Sharpe Ratio

The Sharpe Ratio is a measure of excess returns generated over and above the risk free rate, per unit of risk. It demonstrates a trade-off between risk and returns. Risk is taken to be the fund’s standard deviation. As standard deviation represents the total risk experienced by a fund, it reflects the returns generated by undertaking all possible risks. A higher Sharpe Ratio is better as it represents a higher return generated per unit of risk. It measures a ratio of return to volatility and is calculated by subtracting the risk-free rate from the return of the portfolio, and then dividing by the standard deviation of the portfolio.

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