Developed by William Sharpe, it tells you how much return a portfolio generated for each unit of risk. A higher Sharpe ratio indicates a better risk-adjusted performance. It is one of the most widely used metrics for comparing funds.
Formula
Sharpe Ratio = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation of Portfolio
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Example
A fund returning 15% with 10% volatility and a 6% risk-free rate has a Sharpe ratio of (15−6)/10 = 0.9.
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Relevant NISM series
CFANISM Series XV
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