The Sharpe Ratio

The Sharpe Ratio measures how much extra return an investment provides for each unit of risk taken. It compares the investment's return above a risk-free rate (like a government bond) to its variability or volatility. A higher Sharpe Ratio indicates better risk-adjusted performance, meaning you earn more extra return without taking on excessive risk. It helps investors evaluate whether a higher return is worth the additional risk, allowing for better comparison of investment options based on their efficiency in generating returns relative to risk.