The Sharpe Ratio is a measure of the risk-adjusted return of an investment. It was developed by economist William Sharpe in the 1960s as a way to compare the return of an investment to the risk-free rate of return. The ratio compares the excess return of an investment (i.e. the return of the investment over the risk-free rate) to the volatility of the investment.The Sharpe ratio is calculated as follows: -(Return of Investment - Risk-Free Rate) / Standard Deviation of InvestmentThe risk-free rate is typically represented by the return on a 3-month US Treasury bill, which is considered to be a risk-free investment. The standard deviation is a measure of the volatility of the investment.The higher the Sharpe ratio, the better the risk-adjusted return of the investment. A ratio of 1 or higher is considered to be good, while a ratio of less than 1 is considered to be poor.It's important to note that the Sharpe ratio doesn't take into account the skewness or kurtosis of the returns, and it may not accurately capture the risk of an investment in case of extreme events. Therefore, it should be used in combination with other risk management techniques and methods.
