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The Sharpe ratio can be used to evaluate a portfolio’s performce and to compare investments (or the performances of managed portfolios) with different risk and return profiles, i.e., "assign a price to risk".

In short, it is an expressed percentage return for each unit of risk in an investment. Because of its simplicity, it is probably the most commonly used metric for assessing performance.

It is defined as the difference between the return on the investment (or portfolio) and the risk-free interest rate, divided by the volatility of the investment (measured using the standard deviation).

The higher the Sharpe ratio, the better the result for the investor as measured in terms of the risk-weighted return.

This metric is named after William Sharpe, the 1990 Nobel Prize winner in economics

Related topics

See also Sortino-Ratio

See also Treynor-Ratio

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