Quick Definition

The Sharpe Ratio is a measure used to assess the performance of an investment by adjusting for its risk.

Formula

Examples

• 1An investor comparing two mutual funds finds that Fund A has a Sharpe Ratio of 1.2 and Fund B has a Sharpe Ratio of 0.8, indicating that Fund A offers better risk-adjusted returns.
• 2A portfolio manager uses the Sharpe Ratio to justify the inclusion of certain higher-risk securities that have proportionately higher expected returns.
• 3During an annual review, an investor notices that their portfolio's Sharpe Ratio has decreased, prompting a reassessment of the investment strategy to improve risk-adjusted returns.

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