Sharpe Ratio
A sample- and convention-dependent excess-return-to-volatility ratio, not a universal ranking of investment quality.
The Sharpe ratio divides an investment excess return over a selected risk-free or reference rate by the standard deviation of returns. The result depends on return frequency, sample period, annualization, benchmark rate, valuation smoothing, leverage, fees, and distribution shape.
Frequently Asked Questions
What is a good Sharpe ratio?
There is no universal cutoff. Comparisons should use consistent periods, frequencies, currencies, risk-free rates, fees, and valuation methods, and should consider tail risk, liquidity, capacity, and estimation error.
How should a negative Sharpe ratio be interpreted?
It indicates average return below the selected reference rate for the sample. Ranking negative Sharpe ratios can be counterintuitive because a larger denominator can make a poor result appear less negative.
Can a high Sharpe ratio hide risk?
Yes. Illiquid or smoothed valuations, selling options, leverage, stale prices, short samples, and rare losses can inflate the ratio while leaving substantial tail or liquidation risk.
Is Sortino always better than Sharpe?
No. Sortino focuses on a selected downside threshold, but it also depends on sample and conventions. Neither ratio fully captures drawdown, skew, liquidity, leverage, or investor-specific losses.