Sharpe ratio


Sharpe ratio measures the relative performance of funds or the performance of a portfolio manager.

The Sharpe ratio can be calculated as the average returns in excess of the risk-free rate, divided by the standard deviation of returns, a measure of the average excess returns earned per unit of standard deviation of returns.

The formula being:-


Source: Tavaga Research 

Where Sh refers to the Sharpe ratio, Rp refers to the returns on the portfolio and Rf refers to the risk-free returns rate in the economy and Sp refers to the standard deviation of the returns of a portfolio.