What it is
The Sharpe ratio is a metric used to evaluate the performance of an investment or portfolio by adjusting its return for risk. It is calculated by subtracting the risk-free rate from the investment's return and then dividing that result by the investment's standard deviation (a measure of volatility). A higher Sharpe ratio indicates a better risk-adjusted return, meaning the investment provides more return per unit of risk.
Investors use the Sharpe ratio to compare different investment options, helping them choose those that offer the best returns for the level of risk they are willing to accept. For example, two investments might have similar returns, but the one with a lower standard deviation and thus a higher Sharpe ratio is generally preferred. Fund managers often cite their Sharpe ratios to attract investors.
Why it matters
This ratio helps you choose investments that deliver better returns for the risk taken, improving portfolio efficiency. Aim for higher Sharpe ratios.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice