Sharpe Ratio - AshokBhat/investing GitHub Wiki

About

  • Characterizes how well the return of an asset compensates the investor for the risk taken.
  • Typically, a higher Sharpe ratio is better.
  • Developed by William Sharpe in 1966

Definition

  • Defined as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment (i.e., its volatility)

Limitations

  • Treats all volatility as bad
  • Schemes where there is no volatility for a long time like Ponzi schemes will have high Sharpe ratio

See also