High Sharpe Ratio-Your Sharpe Ratio must be 1 or higher
The Sharpe Ratio is a measure of the risk-adjusted return. It was derived by Professor William Sharpe, one of the three economist who received the Nobel Prize in Economics in 1990 for their contribution to the “Modern Portfolio Theory.”
The greater a portfolio's Sharpe, the better its risk-adjusted performance has been. The Sharpe Ratio is calculated by subtracting the risk-free rate of return from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio. The Sharpe Ratio shows the investor whether the returns of a portfolio are due to smart investment decisions or a result of excess risk. Sharpe is useful in comparing portfolios to determine the amount of risk taken verses the rate of return achieved. One portfolio may have higher returns than its peers, however, it is only a better portfolio if it did not take additional risks to achieve these higher returns.
The Sharpe ratio is a measure of risk-adjusted performance of an investment asset, or a portfolio.
It is defined as:
Sharpe Ratio=
ROR (Rate of Return) - (Money Market)
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STD (Standard Deviation) (Risk)