Sharpe ratio definition
The Sharpe ratio allows investors to calculate what returns are on offer for holding a higher-risk asset.
Specifically, it represents the excess return from the extra volatility of the riskier asset. Investors can use the Sharpe ratio to see if taking on a riskier asset is worthwhile, compared to holding a lower-risk or risk-free asset. The ratio was developed by William Sharpe in 1966, who was revered for his work on the capital asset pricing model.