Sharpe ratio Finance

This refers to a financial metric that is widely used to calculate the risk ­adjusted return on an investment. The risk ­adjusted return is derived by calculating the additional return in excess of the risk free rate of return that an investment provides an investor and dividing it by the amount of volatility that its price exhibits relative to the general market. Volatility is considered to be a measure of risk, which in turn should be compensated by excess returns. The Sharpe ratio was proposed in 1966 by American economist William F. Sharpe, who later won a third of the Nobel Prize in Economic Sciences in 1990. However, critics of the Sharpe ratio contend that volatility does not define risk.