A risk-adjusted measure developed by Nobel Laureate William Sharpe. It is calculated by using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the portfolio�s historical risk-adjusted performance. The Sharpe Ratio can be used to compare two portfolios directly with regard to how much excess return each portfolio achieved for a certain level of risk.
er = excess return
= monthly standard deviation
n = periods in a year
Monthly,
Annualized,
Arithmetic Sharpe Ratio is calculated similarly, except the arithmetic excess return is the numerator instead of the geometric excess return. When annualizing, use multiplication for the numerator instead of compounding.