Finance Dictionary
Sharpe Ratio
A measure of risk-adjusted return. It tells how much excess return you receive for each unit of risk taken. Higher is better; >1 is good, >2 is excellent.
Formula
Sharpe Ratio = (Portfolio Return − Risk-Free Rate) / Standard Deviation
Example
Fund A with 15% return and Sharpe of 1.5 is better than Fund B with 18% return but Sharpe of 0.8.