Sharpe Ratio

What is Sharpe Ratio?

The Sharpe ratio evaluates how much excess return (above the risk-free rate) an investor receives per unit of total risk (standard deviation). A higher Sharpe ratio means better risk-adjusted performance: the portfolio earns more return per unit of volatility assumed. A Sharpe ratio below 1 is often considered suboptimal for an actively managed fund; above 1 is good; above 2 is excellent and uncommon. Because it uses total standard deviation in the denominator, the Sharpe ratio penalises both upside and downside volatility equally. For portfolios where only downside risk matters, the Sortino ratio is a better alternative. All rate inputs must use consistent units — both in percent or both as decimals.