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Term of the Day | Investopedia
The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such calculations.

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March 28, 2016
Sharpe Ratio

The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such calculations. It was developed by Nobel laureate William F. Sharpe. The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return, the performance associated with risk-taking activities can be isolated. One intuition of this calculation is that a portfolio engaging in "zero risk" investment, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.

Breaking It Down:

The Sharpe ratio has become the most widely used method for calculating risk-adjusted return; however, it can be inaccurate when...

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Learn about this ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance.

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Related Definitions

Sortino Ratio
Modified Sharpe Ratio
Downside Deviation
Roy's Safety-First Criterion - SFRatio
Jensen's Measure

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Dove
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