What is Sharpe Ratio?
Sharpe ratio compares a fund's excess return with the total volatility taken to earn it.
How is Sharpe Ratio calculated?
The common formula is fund return minus the risk-free rate, divided by standard deviation. Period and assumptions must match when comparing funds.
How should it be interpreted?
A higher value generally indicates stronger historical risk-adjusted return, but comparisons should stay within similar categories and periods.
Why not use Sharpe Ratio alone?
It is backward-looking and treats upside and downside volatility alike. Use it with drawdown, category context and portfolio analysis.
FAQ
Can Sharpe Ratio predict future returns?
No. It describes historical risk-adjusted performance and is not a return guarantee.