Sharpe ratio
The Sharpe ratio measures an investment’s excess expected return over the risk-free rate per unit of return volatility.
Build a Robo-Advisor with Python (From Scratch)
The Sharpe ratio is the expected return above the risk-free rate divided by the investment's volatility, measuring expected reward per unit of risk.
- How it is used
- Evaluates investments by expected excess return relative to volatility rather than by return alone.
- How deep it goes
- Derives the formula from the capital allocation line, works a leverage example, and distinguishes total from diversifiable risk.
- Examples
- Uses a leveraged $1 million investment and capital allocation line diagrams to illustrate interpretation and comparison.
- What you can do after
- Evaluate investments using expected excess return, volatility, leverage invariance, and portfolio-level risk.
Read how Build a Robo-Advisor with Python (From Scratch) explains Sharpe ratio →
Investing for Programmers
The Sharpe ratio is a portfolio performance measure that compares excess return over the risk-free rate with the portfolio's volatility.
- How it is used
- Evaluates portfolio returns against volatility when comparing risk-adjusted performance.
- How deep it goes
- Calculates the ratio inside portfolio simulation and visualization, while distinguishing it from the broader efficient-frontier criterion.
- Examples
- Uses historical prices, seven named stocks, 10,000 simulated portfolios, plots, and an optimal-weight table.
- What you can do after
- Evaluate candidate portfolios by calculating, ranking, plotting, and inspecting their Sharpe ratios.
Related concepts
- risk-adjusted returnmeasures · Risk-adjusted return is investment performance evaluated relative to the amount or type of risk taken to achieve it.
- information ratioequivalent to · The information ratio is the expected return above a benchmark divided by the volatility of the portfolio's return difference from that benchmark.
- alphacontrasts with · Alpha is investment performance beyond a relevant benchmark or the return explained by specified systematic risk factors.
- risk-free returnused by · Risk-free return is the theoretical return on an investment assumed to have no default or other relevant uncertainty risk over a specified horizon.
- tangent planeequivalent to · A tangent plane is the plane that locally best approximates a smooth surface at a specified point.
- slopeproduced by · Slope is the rate at which a dependent quantity changes relative to an independent quantity, often represented by a line’s gradient or a coefficient in a linear relationship.
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