Stock Market Glossary
Sharpe ratio
Ratio of excess return to volatility.
In brief: Ratio of excess return to volatility.
Meaning in practice
Sharpe ratio = (return – risk-free interest rate) / standard deviation. It makes strategies comparable on a risk-adjusted basis. Higher values are better; Values above 1 are considered good, above 2 are considered excellent.
Context for investors and traders
For investors, the term becomes practical in the context of objectives, time horizon, risk capacity and costs. A suitable solution can differ between two people even when they consider the same product or metric.
How to use this in practice
The term becomes practical when expressed in numbers: what is the position weight, which costs apply, what loss is possible and what role does it play in the portfolio? These questions prevent an otherwise useful product from becoming too large or being used at the wrong time.
What to keep in mind
Include taxes, spreads, product structure and personal liquidity reserves in comparisons. Historical returns and a fund’s or index’s characteristics describe the past, not a promised future result.
