Sharpe Ratio Definition
The Sharpe Ratio was created to measure performance after being adjusted for risk. The Sharpe Ratio allows investors to determine how returns were obtained whether it’s due to excess risk assumed on the asset or hedge fund portfolio or if returns were obtained through intelligent planned investment selections. If a portfolio or asset has a high Sharpe ratio then that portfolio or asset has returns that were very successfully risk-adjusted.
Sharpe ratio measures risk to reward ratio and whether the returns of a specific asset or portfolio have properly compensated for the amount of risk undertaken. The higher the Sharpe Ratio = returns are more and more risk adjusted = desirable
Want something more meaty? Here is a whitepaper on the Sharpe Ratio by William Sharpe himself.
Read dozens of additional articles like this within the guide to Hedge Fund Terms.
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