Börsenlexikon: Sharpe Ratio

This ratio measures the excess return in relation to the risk taken with a particular security. The excess return is defined as the return in excess of the safe money market investment. The risk of the investment is expressed by its volatility. For example, if a relatively risk-free money market fund yields three percent over the same period, but a stock fund yields ten percent, the latter has an excess return of seven percent. If one calculates with the share fund a generally higher volatility, thus a much higher intermediate risk, then this investment must not have been more reasonable. Consequently, an investor should know which investment has generated which return with which risk. The Sharpe ratio helps with this. It facilitates the investment decision of the investor, if he is to select between two Invevestments, of which one yields somewhat less net yield than the other one, however, for it much less risk entails. The more positive the Sharpe ratio, the more it speaks for the respective investment. If it falls below zero, then caution is called for.