The Sharpe ratio divides a portfolio's return above the risk-free rate by its standard deviation. Higher is better — it means more return for each unit of volatility taken.
Above 1 is considered good, above 2 excellent, above 3 exceptional. Beware Sharpe ratios calculated over short periods or during unusually calm markets.
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Open Decision Lab →Frequently asked questions
Sharpe or Sortino?
Sortino is similar but only penalises downside volatility, arguably a better fit for investors who don't mind upside surprises.