Sharpe Ratio

A measure of risk-adjusted return developed by Nobel laureate William Sharpe in 1966. It is calculated by subtracting the risk-free rate from the portfolio's return and dividing by its standard deviation. A Sharpe ratio above 1.0 is generally considered good, above 2.0 is very good, and above 3.0 is exceptional. The ratio allows investors to compare strategies on an apples-to-apples basis, answering the question: "How much return am I getting per unit of risk?"