Sharpe Ratio
Return above the risk-free rate per unit of total volatility.
Formula
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation of Portfolio Returns
Unit
ratio (x, times)
In depth
The Sharpe ratio is the standard measure of risk-adjusted return and makes strategies with different volatilities comparable — a 30% return with 40% volatility is worse than a 14% return with 8%. Its main limitation is that it penalises upside volatility as heavily as downside, so a strategy with occasional large gains is scored down for them. It also assumes returns are reasonably normal, which makes it flatter strategies that sell tail risk and appear smooth until they fail. Comparisons are only valid over the same period and frequency, since annualising from daily or monthly data gives different answers.
Worked example
A portfolio returning 14% with 12% volatility against a 7% risk-free rate has a Sharpe ratio of (14 - 7) / 12 = 0.58. A second returning 22% with 30% volatility scores (22 - 7) / 30 = 0.50 — higher return, worse ratio.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Sharpe Ratio” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.