Sharpe ratio

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

Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle 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.

Development

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