Sharpe Ratio

The Sharpe Ratio, developed by William F. Sharpe, is used to measure risk/reward efficiency within a portfolio or trading strategy.  The calculation uses the standard deviation of returns to determine how "risky" a portfolio is.  The higher the Sharpe Ratio value, the better the risk for return the portfolio is.  A Sharpe ratio value around or greater than 2 is considered excellent.  It is generally advised that anything below 1 should not be considered.

See Also

Payoff Ratio

Profit Factor

Recovery Factor

Risk Adjusted Return

Risk Assessment Options