Sharpe Ratio — Mutual Fund Term Explained

Return per unit of total risk taken. Higher is better. Shows how much excess return you earn for each unit of volatility.

The Sharpe Ratio measures how efficiently a fund generates returns relative to total risk (volatility). Divides the fund's excess return above the risk-free rate by its standard deviation.

A Sharpe ratio above 1.0 is generally good. Compare only within the same fund category.

Formula

Sharpe Ratio = (Fund Return − Risk-Free Rate) ÷ Standard Deviation

Example

Fund return 14%, Risk-free rate 6%, Std Dev 12% → Sharpe = 0.67

Related terms

• Sortino Ratio — Like Sharpe, but only penalises downside volatility. A better measure because upward swings are not a problem for investors.
• Standard Deviation — How much a fund's monthly returns fluctuate around their average. Higher = more volatile = higher risk.
• Beta — A measure of a fund's sensitivity to market movements. Beta of 1 moves with the market; >1 means amplified moves; <1 means dampened moves.
• Treynor Ratio — Return per unit of market risk (beta). Like Sharpe but uses beta instead of standard deviation.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.