A measure for calculating risk-adjusted return of investments.

Named after economist William F. Sharpe, the Sharpe ratio describes the return earned in excess of a risk-free investment while taking into account the average risk in a given fund.

The Sharpe ratio is expressed in absolute terms. In case the result is more than 1, the fund has achieved an excess return. If the result is between 0 and 1, the return is higher than the money market interest rates, but does not match the calculated risk. A negative Sharpe ratio indicates that the return of the security does not even equal that of a risk-free money market investment.

The risk is calculated using the volatility, the measure of the fluctuation of a security price or index to its average value in a set period of time.

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