Sharpe ratio

CFA Level I Glossary

The Sharpe ratio is excess return over the risk-free rate divided by total volatility (standard deviation). It measures reward per unit of total risk and is useful when unsystematic risk matters or the portfolio is the whole risky wealth. Treynor uses beta instead of total risk; Sortino focuses on downside deviation. Using Sharpe to rank undiversified single names as if only systematic risk mattered is a common misuse.

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