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Sharpe ratio

Return above the risk-free rate, divided by volatility.

Risk & PsychologyAdvanced

Definition

It measures how much return you earned per unit of risk. A higher number means smoother returns for the same gain.

Formula

Sharpe = (portfolio return - risk-free rate) / standard deviation of returns

Watch out for

It treats upside and downside volatility alike and can look good until a rare loss arrives.

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