Sharpe Ratio

Risk-adjusted return per unit of volatility

What is Sharpe Ratio?

Sharpe Ratio A measure of risk-adjusted return calculated as the excess return (above the risk-free rate) divided by the standard deviation of returns. Higher Sharpe ratios indicate better risk-adjusted performance. Options strategies that consistently sell premium often have high Sharpe ratios during calm markets but can suffer during tail events.

Complete Definition

A measure of risk-adjusted return calculated as the excess return (above the risk-free rate) divided by the standard deviation of returns. Higher Sharpe ratios indicate better risk-adjusted performance. Options strategies that consistently sell premium often have high Sharpe ratios during calm markets but can suffer during tail events.

Example

Strategy A returns 15% with 20% volatility (Sharpe 0.65). Strategy B returns 10% with 10% volatility (Sharpe 0.90). B has better risk-adjusted performance.