Difference between revisions of "Sharpe ratio"
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| − | The '''Sharpe ratio''' is a financial | + | 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 |
: <math>S = \frac{E(r) - r_f}{\sigma} </math> | : <math>S = \frac{E(r) - r_f}{\sigma} </math> | ||
where <math>E(r)</math> is the asset's expected return, <math>r_f</math> is the risk-free rate (normally, the rate of return of a United States T-bill) and <math>\sigma</math> is the risk associated with the investment. | where <math>E(r)</math> is the asset's expected return, <math>r_f</math> is the risk-free rate (normally, the rate of return of a United States T-bill) and <math>\sigma</math> is the risk associated with the investment. | ||
| + | |||
| + | ==Development== | ||
| + | The concept of a Sharpe ratio was first developed by William Sharpe, a professor finance at [[Stanford University]]. | ||
[[Category:Finance]] | [[Category:Finance]] | ||
Revision as of 02:56, October 24, 2011
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
where is the asset's expected return, is the risk-free rate (normally, the rate of return of a United States T-bill) and is the risk associated with the investment.
Development
The concept of a Sharpe ratio was first developed by William Sharpe, a professor finance at Stanford University.