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| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
The Sharpe measure, or the Sharpe ratio, named after Nobel Price-winning economist William Sharpe, is the amount of performance that a fund earns over and above the risk-free rate of return divided by the standard deviation of returns.
More specifically, the ratio is as follows:
The Sharpe measure shows whether the portfolio's return for taking risk (the return minus the risk-free rate) came by increasing the amount of risk in the portfolio or from the fund manager's skill (alpha), which allowed him or her to get a better return than expected from the amount of standard deviation in the securities held by the portfolio. A higher number is better than a lower number because a higher number indicates that the hedge fund manager is getting more return for the risk that she's undertaking. In other words, The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.
A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility.
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