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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
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]]