Performance & Return
Sharpe Ratio
Definition
A measure of return per unit of risk calculated as excess return divided by the standard deviation of returns.
Why it matters
It allows comparison of portfolios or strategies on a risk-adjusted basis not just raw return.
What most investors miss
The gap between what the term means and how it is usually applied.
They compare raw returns without adjusting for risk. A higher return from a more volatile portfolio is not necessarily better.
How to read it
Use Sharpe ratio to compare strategies of different risk levels. A lower return with much lower volatility can be the better portfolio.
Multi-account lens
How this term reads differently across brokers and accounts.
Calculating Sharpe ratio across a fragmented portfolio requires consolidated return and volatility data. Neither is available from a single broker.
Related terms
Terms that connect to sharpe ratio.
Volatility
The degree to which the portfolio's value fluctuates over time.
Alpha
The return generated above what the portfolio's benchmark or market exposure would have predicted.
Portfolio Performance
The overall return of the portfolio over a defined period accounting for all holdings cash and distributions.
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