Plain-English definitions, reviewed by an independent investor
Sharpe Ratio
The Sharpe ratio measures excess return per unit of total risk, so you can compare funds on equal risk footing.
The Sharpe ratio measures excess return per unit of total risk, so you can compare funds on equal risk footing.
Sharpe = (Return − Risk-Free Rate) ÷ Standard Deviation
Why it matters
It rewards efficient risk-taking rather than raw returns.
Common confusion
It penalises only volatility, not the direction; a smooth downhill still scores poorly, correctly.
Frequently Asked Questions
What is a good Sharpe?
Above 1 is decent, above 2 strong; below 0 means worse than cash per unit risk.
Sharpe vs Sortino?
Sortino only penalises downside swings, which many prefer.