Sharpe Ratio

Measure of the performance of an investment, computed by dividing the excess return by the amount of risk taken to generate the excess. A ratio of 1 indicates one unit of return per unit of risk, 2 indicates two units of return per unit of risk, and negative value indicate loss or that a disproportionate amount of risk was taken to generate a positive return. Sharpe Ration was invented by the Nobel laureate (1990) US Economist William Sharpe (born 1934). This is also called market price of risk.

Excess Return here meant the return that is over the return on a risk-free investment such as on Treasury bills.

 

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