Sharpe Ratio

The Sharpe Ratio is a tool for evaluating how well an investment compensates you for the risk you take. It measures the excess return of an asset—meaning the return above a so-called risk-free rate—and divides that by the asset’s volatility. The end result is a single number that helps investors compare different investments on an equal footing. A higher Sharpe Ratio generally indicates better risk-adjusted performance, but it's wise to look at other factors before making investment decisions.