Glossary · Risk
Sharpe ratio
Return earned per unit of volatility — a way of comparing results that were achieved with different amounts of risk.
The Sharpe ratio divides return in excess of a risk-free rate by the standard deviation of returns. Two funds with the same return but different volatility get different Sharpe ratios; the steadier one scores higher.
It treats upside and downside movement identically, so a fund that rises sharply is penalised the same as one that falls sharply. The Sortino ratio addresses that by counting only downside deviation.
A Sharpe ratio is only comparable between series measured over the same window and at the same observation frequency. Where the assumed risk-free rate is zero, that is stated rather than implied.
How we calculate it
Mean weekly return ÷ standard deviation of weekly returns × √52, over 1, 3 and 5 years of weekly closes in pounds. The risk-free rate is taken as zero, so the figure is higher than one measured against cash (SONIA).
The full method, with a worked exampleRelated terms
- Sortino ratioLike the Sharpe ratio, but measuring only downside volatility.
- VolatilityHow much a fund’s returns vary around their average, usually stated as an annualised standard deviation.
- Maximum drawdownThe largest peak-to-trough fall over a period — the worst loss a holder would have sat through.
More terms on risk
Definitions describe how a term is used on Fundology. This is information, not advice.