Sharpe Ratio
Excess return per unit of total volatility. The most widely used risk-adjusted performance metric.
Details
- category: Risk-Adjusted Performance
- use cases: Manager selection, Portfolio comparison, Strategy benchmarking
- formula: Sharpe = (R_p - R_f) / σ_p
- formula latex: \text{Sharpe} = \dfrac{R_p - R_f}{\sigma_p}
- assumptions: Returns are normally distributed, Volatility is a complete measure of risk, Returns are independent and identically distributed (i.i.d.)
- limitations: Penalizes upside and downside volatility symmetrically, Inappropriate for strategies with negatively-skewed return distributions (option-writing, merger arb), Sensitive to choice of risk-free benchmark and observation frequency, Annualized Sharpe via √T scaling assumes i.i.d. returns; serial correlation inflates Sharpe
- related terms: sharpe-ratio, sortino-ratio, information-ratio, risk-free-rate, volatility
- implementation notes: Server compute: returns Sharpe directly. For Sharpe from a return series, use /api/v1/compute/sharpe-ratio-series.
Formula
Sharpe = (R_p - R_f) / σ_p