DEFINITION of 'Sharpe Ratio'
A ratio developed by Nobel laureate William F. Sharpe to measure riskadjusted performance. The Sharpe ratio is calculated by subtracting the riskfree rate  such as that of the 10year U.S. Treasury bond  from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The exante Sharpe ratio formula is:
The expost Sharpe ratio uses the same formula but with realized portfolio return instead of expected return.
INVESTOPEDIA EXPLAINS 'Sharpe Ratio'
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. Although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its riskadjusted performance has been. A negative Sharpe ratio indicates that a riskless asset would perform better than the security being analyzed.
A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility.
For more on the Sharpe Ratio read Understanding The Sharpe Ratio Better and Finding The Highest Returns With The Sharpe Ratio
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