Sharpe ratio definition

The Sharpe ratio allows investors to calculate what returns are on offer for holding a higher-risk asset.

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.

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