Measures risk-adjusted return by comparing excess return to volatility. Named after William Sharpe (Nobel 1990). >1 is good, >2 is excellent.
Sharpe = (Rp - Rf) / σp
function sharpeRatio(portfolioReturn, riskFreeRate, volatility) {
// Excess return: return above risk-free rate
const excessReturn = portfolioReturn - riskFreeRate;
// Sharpe = excess return / volatility
const sharpe = excessReturn / volatility;
return sharpe;
}
// Interpretation:
// < 0.25 = Poor
// 0.25-0.5 = Below Average
// 0.5-0.75 = Average
// 0.75-1 = Good
// > 1 = Excellent