Sharpe ratio

The Sharpe ratio is a financial measure of 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, $r_{f}$ is the risk-free rate (normally, the rate of return of a United States T-bill) and $\sigma$ is the risk associated with the investment.