Sharpe ratio

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The Sharpe ratio or reward-to-variability ratio is a financial ratio that measures the compensation (called a "risk premium") an investor receives for bearing an additional unit of risk. It is defined as

S = \frac{E(r) - r_f}{\sigma}

where E(r) is the asset's expected return, rf is the risk-free rate (normally, the rate of return of a United States T-bill) and σ is the risk associated with the investment.

Development

The concept of a Sharpe ratio was first developed by William Sharpe, a professor of finance at Stanford University.

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