What is Sharpe ratio?
Return per unit of risk (volatility). Higher is better. Above 1.0 is considered very good over long periods.
The Sharpe ratio measures return per unit of risk: the return above a risk-free rate (such as Treasury bills), divided by volatility. It was introduced by Nobel laureate William F. Sharpe.
A Sharpe ratio of 0.5 is typical for a stock index over long periods; around 1.0 is considered very good; consistently above 1.5 is rare. Higher means you were paid more for each unit of fluctuation you had to sit through.
The Sharpe ratio is ideal for comparing strategies with different risk levels, but it treats upside and downside swings alike and can flatter strategies with rare, large losses — which is why we always show it next to the maximum drawdown.
Related terms
See Sharpe ratio applied to real markets — 30 markets, decades of data — in the Research Terminal.
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