Sharpe Ratio

Also known as: sharpe

The Sharpe ratio divides a strategy’s excess return (above the risk-free rate) by its volatility — reward per unit of risk. It lets you compare a calm strategy to a racy one fairly (>1 decent, >2 excellent, >3 be suspicious). Its blind spots: it penalises upside volatility and underestimates fat-tail blow-up risk.