Sharpe ratio
Certified Financial Planner glossary · Certified Financial Planner
Definition
Excess return per unit of total risk; the appropriate measure where the portfolio is not fully diversified.
Sharpe ratio in plain English
You are judging a concentrated sleeve that still carries plenty of idiosyncratic noise, not a fully diversified market portfolio. The Sharpe ratio measures excess return per unit of total risk, which is the right lens when the portfolio is not fully diversified. Formula intuition: (return minus risk-free) divided by standard deviation. If the portfolio is well diversified, Treynor or beta-based comparisons may fit better than Sharpe's total-volatility denominator.
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