sharpe ratio

A measure of the risk/return relationship in a security, devised by William Sharpe in 1966. The Sharpe ratio is calculated by subtracting the risk-free rate (such as the return on T-bills) from an assets average rate of return and dividing by the asset’s standard deviation. The higher the ratio, the more excess return investors can expect to receive for the extra volatility they are exposed to by holding a riskier asset. Similarly, a risk-free asset or a portfolio with no excess return would have a Sharpe ratio of zero.