Sharpe ratio: a standalone construct

William F. Sharpe first defined this measure in his 1966 study Mutual Fund Performance, where he called it the reward-to-variability ratio: the average return an investment earns above a safe, risk-free rate, divided by the standard deviation of those returns (a statistic that captures how much the returns swing up and down over time). Sharpe restated and generalised the measure in his 1994 article The Sharpe Ratio, giving it the name now in common use and framing it as the expected difference between a portfolio and a benchmark per unit of the variability of that difference. In plain terms it answers a single question: for each unit of total risk an investor bears, how much extra reward did the investment deliver. It is distinctive in dividing by total risk, the full variability of returns, rather than by only the market-linked portion of risk that some rival measures use, so a higher value reports more return for the same amount of variation. The measure is reported as a dimensionless number and is one of the most widely cited yardsticks for comparing the risk-adjusted performance of funds and portfolios.[1][2]

Unit

A dimensionless ratio: mean excess return divided by the standard deviation of returns

Recovery means

Not applicable

Measured by

Computed as a portfolio's average return minus the risk-free rate, divided by the standard deviation of the portfolio's excess returns over a sample period