Portfolio Risk & Return

Sharpe Ratio

Return earned per unit of risk taken. It subtracts the risk-free rate (what a Treasury bill would have paid with no risk at all) from the portfolio’s return, then divides what is left by the portfolio’s volatility. A Sharpe ratio of 1.0 means the portfolio earned one percentage point of extra return for every point of volatility it carried. Higher is better: two portfolios with the same return are not equally good if one got there with twice the swings. As a rough guide, many investors read below 0.5 as thin pay for the risk, 0.5 to 1.0 as reasonable, and above 1.0 as strong. The catch: it treats upward and downward swings alike, it assumes returns are roughly bell-shaped, and it looks backward — a calm window flatters it. The Sortino ratio answers the first of those objections.

Educational information, not investment advice. See it applied across the screener →