A measure of risk-adjusted return calculated by subtracting the risk-free rate from the portfolio return and dividing by the standard deviation of returns. Higher ratios indicate better risk-adjusted performance.
Named after Nobel laureate William F. Sharpe who developed this metric in 1966 as part of his work on portfolio theory. It became the standard measure for evaluating whether higher returns justify the additional risk taken.
The Sharpe ratio is like a report card for risk-taking - it tells you how much extra return you got for each unit of risk you took on! A Sharpe ratio above 1 is generally considered good, above 2 is excellent, and above 3 is exceptional, but most investments struggle to maintain high Sharpe ratios consistently.
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