Business and Personal Finance Dictionary

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• SHARPE RATIO
  
  A measure of investment performance, namely, the investment's average excess rate of return (investment's rate of return minus riskless rate of return), divided by its standard deviation of rate of return. Thus, the Sharpe ratio measures how many standard deviations the average rate of return is from the riskless rate of return. If the distribution of rate of return were normal and we knew its mean and variance exactly, the Sharpe ratio would provide an idea of the probability that the risky investment would beat a riskless investment. William Sharpe, creator of the Sharpe model of capital market equilibrium (1964) and subsequently Nobel Prize Winner in Economics, devised the Sharpe ratio.
  
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