Sharpe Ratio

From Reuters Financial Glossary

A way of deciding whether returns are produced by intelligent investment decisions or by accepting excess risk. It measures the return of an investment compared with investments in government bonds, which are regarded as virtually risk free because the government in theory always repays its debts. The Sharpe Ratio is calculated by subtracting the rate of return on government securities from the rate of return on a portfolio, and then dividing the difference by the standard deviation of the portfolio's returns.

See also: Deviation