The Sharpe ratio divides return by its volatility (risk = standard deviation). For the same profit, a smoother equity curve scores higher.
The Sharpe Ratio divides return by its dispersion (standard deviation = risk) — the classic risk-adjusted return metric.
Sharpe = (return − risk-free rate) ÷ standard deviation of returns
How to read it
- Higher = the same profit earned more steadily (less variation). Generally above 1 is good, above 2 is excellent.
- It compares the "ride quality" (smoothness) that a raw return cannot show.
Notes
- Because it assumes a normal distribution, averaging types with large tail risk can look good in calm periods yet understate real risk. Read with max DD.
- The value depends on the period and data frequency — compare on equal terms.
