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.
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