The Sharpe Ratio as a Measure of Risk-Adjusted Return

Summary

The document defines the Sharpe ratio as a way to assess a portfolio or strategy’s excess return relative to the variability of its returns. It gives the calculation: subtract the risk-free rate from average portfolio return, then divide by the standard deviation of investment returns.

This is a concise definition rather than a worked example or full discussion. It does not specify the return frequency, annualization method, or assumptions behind the risk-free rate, and it provides no empirical comparison or performance evidence. Readers should treat the ratio as one summary statistic, not a complete account of risk or strategy quality.

Key ideas

• The Sharpe ratio relates excess return to the standard deviation of returns.
• The stated calculation subtracts the risk-free rate from average portfolio return and divides by return standard deviation.
• The document gives no guidance on annualization, sampling frequency, or interpreting the measure alongside other risk metrics.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.