Sharpe Ratio
Sharpe Ratio — A risk-adjusted return metric that compares strategy returns to volatility — higher is better.
- Quick definition: A risk-adjusted return metric that compares strategy returns to volatility — higher is better.
- Category: Performance Metrics
Full Definition
Sharpe ratio = (annual return - risk-free rate) / annualized standard deviation of returns. A Sharpe above 1.0 is considered good, above 2.0 is excellent, above 3.0 is exceptional. Sharpe penalises high-volatility strategies even if they're profitable. Many prop firms reward higher Sharpe with payout bonuses.
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