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
(Annualised return − SONIA) ÷ annualised volatility, over 5 years of weekly data.
Related
Sortino ratio
Like the Sharpe ratio, but measuring only downside volatility.
Volatility
How much a fund’s returns vary around their average, usually stated as an annualised standard deviation.
Maximum drawdown
The largest peak-to-trough fall over a period — the worst loss a holder would have sat through.