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Sharpe ratio
Return per unit of volatility. It asks how much turbulence you endured for the gain, so a smoother path scores better than a wild one that ends up level with it.
Updated 2026-09-03
The Sharpe ratio measures return per unit of volatility: how much you earned above the risk-free rate, divided by how much the returns bounced around. It is the standard way of asking whether a return was worth the ride.
Sharpe = (return − risk-free rate) ÷ standard deviation of returns
Roughly, above 1 is good, above 2 is very good, and above 3 usually means something is wrong with the test.
The flaw worth knowing
It treats upside and downside volatility identically. A strategy that occasionally returns a spectacular month is penalised exactly as hard as one that occasionally loses a catastrophic month, which is not how anyone actually experiences risk. The Sortino ratio addresses this by counting only downside deviation.
See also
- Calmar ratio — Return measured against the worst loss along the way, rather than against general choppiness. It punishes the single deepest hole.
- Max drawdown — The deepest fall from a peak before a new peak was reached. The number that decides whether a strategy is one you could actually hold through.
- CAGR — Total return restated as a steady yearly rate, which makes runs of different lengths comparable.
Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.
