The Sharpe Ratio is a financial metric used to evaluate the performance of an investment by adjusting for its risk. It measures the excess return an investment generates over the risk-free rate, relative to its volatility. A higher Sharpe Ratio indicates a more attractive risk-adjusted return, making it easier for investors to compare different investments.
To calculate the Sharpe Ratio, subtract the risk-free rate from the investment's return and then divide that result by the investment's standard deviation. This ratio helps investors understand how much return they are receiving for each unit of risk taken, guiding better investment decisions.