The Sharpe ratio is the financial industry’s favorite measure of risk-adjusted returns. It tells investors whether they are being appropriately rewarded for the risks they’re assuming in their investments.
For our purposes here, the Investment return can be either a historical return or an expected annual return. It is expressed using a decimal; for example, 0.51 would represent a 51% return.
We employ the calculated Investment standard deviation, usually based on daily variations, to take into account periodic fluctuations in the investment due to such things as dividends and stock splits.