TRADING GLOSSARY
Sharpe ratio
The Sharpe ratio measures return above a risk-free rate relative to the volatility of those excess returns. It divides average excess return by its standard deviation, using consistent periods; both upward and downward fluctuations count as volatility.
EXAMPLE
Using hypothetical annualised figures, a 10% return, 2% risk-free rate and 16% excess-return volatility produce a Sharpe ratio of (10% − 2%) ÷ 16% = 0.5.
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