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A measure of risk-adjusted return, calculated as the portfolio return minus the risk-free rate, divided by the standard deviation of returns.
The Sharpe ratio tells you how much excess return you receive for the extra volatility you endure. A ratio above 1.0 is considered good, above 2.0 is very good, and above 3.0 is excellent. It allows comparison of investments with different risk levels on a level playing field. For example, Fund A returning 12% with 15% volatility (Sharpe of 0.60, assuming 3% risk-free rate) is inferior to Fund B returning 10% with 8% volatility (Sharpe of 0.88) on a risk-adjusted basis. The Sharpe ratio was developed by Nobel laureate William Sharpe in 1966.