Sharpe ratio
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
Excess return divided by standard deviation; a risk-adjusted performance measure.
Sharpe ratio in plain English
The Sharpe ratio answers a simple question: was the extra reward worth the bumpy ride? Any investment beyond a super-safe one (like a government savings bond) earns some "excess return" — the amount above that safe rate — but it also bounces around, and "standard deviation" just measures how wildly those returns swing up and down. The ratio divides the extra reward by the size of those swings, so a bigger number means you got more reward per unit of stomach-churning. It's like rating roller coasters by how much fun they deliver per scary drop — you'd rather have lots of thrill without being flung around the whole time.
Learn these first
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide