Sharpe Ratio

The Sharpe ratio was invented in 1966 by William F. Sharpe. Investors and economists use this ratio to gauge the possible return on investment (ROI). The Sharpe ratio assesses the likelihood of returns relative to the uncertainty. The ratio is sometimes referred to as the Sharpe index, reward-to-variability ratio, or Sharpe measure.

The Sharpe ratio can, in essence, be used to determine if an investment is risk-worthy. The average return of an investment that exceeds the risk-free rate per unit of deviation of a certain asset is measured technically. The asset with a greater Sharpe ratio would be considered better since it has a bigger potential for gains in relation to other risks if two distinct financial instruments were evaluated based on their Sharpe ratio.

The standard deviation or variance deprives the investor of profits in a typical concept of risk. As a result, when making financial decisions, consider both the benefit and the risk. The Sharpe ratio can assist you in selecting the investment that will yield the maximum returns while taking risk into account.

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