Glossary · from the DESK dictionary
Sharpe Ratio
A measure of an investment's risk-adjusted return.
In plain words
Shows how much extra return you got for the risk you took on (measured by volatility).
In more detail
The Sharpe ratio measures excess return over the risk-free rate per unit of volatility. It is the best-known risk-adjusted metric and has three practically relevant weaknesses: it assumes symmetric return distributions, it cannot be sensibly interpreted with negative excess returns, and it can be artificially improved by strategies with hidden tail risk. A very high Sharpe ratio over short periods is therefore more a warning than a quality signal.
Formula
Sharpe ratio = (Portfolio return − Risk-free rate) / Standard deviation of the portfolio
Example
A strategy delivers a Sharpe of 3.1 over two years. It sells far out-of-the-money puts — the smoothness is sold protection, and in the twenty-fourth month it loses 61 percent.
What it means for traders
One of the most widely used metrics for comparing risk-adjusted investment performance.
Common pitfalls
Uses standard deviation as its risk measure, which treats positive and negative deviations equally — extreme loss risk (tail risk) isn't always adequately captured as a result.
Related terms
Alpha · Calmar Ratio · Diversification · Efficient Frontier · Information Ratio · Kappa Ratio · Return · Sortino Ratio · Standard Deviation · Treynor Ratio · Volatility-Adjusted Return · William Sharpe
From the DESK dictionary. For information only, not investment advice.
This is one page of many.
- The DESK dictionary explains more than 9,400 market terms like this one, in English and German – searchable, sorted by topic and difficulty, with favourites.
- Plus the Macro Terminal with more than 900 indicators per country, company pages and a weekly report.
Also open to read: Glossary A–Z · Free calculators · Weekly report archive
DESK is a research tool and not investment advice. Page generated: 2026-10-12.