Sharpe Ratio

A risk-adjusted performance metric calculated as (return − risk-free rate) / volatility. It measures excess return per unit of risk taken. A higher Sharpe Ratio indicates better risk-adjusted performance. For example, a strategy with 10% return and 15% volatility and a 2% risk-free rate has a Sharpe Ratio of 0.53. The Sharpe Ratio assumes returns are normally distributed, which may not reflect real market behavior during extreme events.