What it means
Sharpe ratio = (portfolio return – risk-free rate) / portfolio standard deviation. Higher is better. A Sharpe of 1 is good; 2 is very good; 3+ is unusual and worth scrutinizing.
Why it matters
It's the most common single-number summary of risk-adjusted performance. Used to compare strategies, allocate capital, and pay out fund managers. Its weakness is treating upside volatility as bad - Sortino ratio fixes that.
How to use it
Always note the period and asset class. Sharpe ratios are not comparable across asset classes. Equities historically run 0.5 long-term; trend strategies aim for 1.0+; arbitrage can be 2-3+.
Take it further
Want a worked example or a deeper dive? Ask Rocky how this concept applies to your specific watchlist or trade idea.
Ask Rocky