Sharpe Ratio

The Sharpe ratio measures risk-adjusted return — how much return a strategy generates for each unit of volatility it takes on — calculated as the excess return over a risk-free rate, divided by the standard deviation of returns. A higher Sharpe ratio means a smoother, more consistent return stream, not just a higher raw return. It's widely used to compare trading strategies or fund managers on equal footing, since a strategy with wildly volatile returns needs a much higher average return to be considered equally attractive to a steadier one.