Sharpe Ratio

The Sharpe Ratio measures risk-adjusted returns by dividing excess return over the risk-free rate by portfolio volatility. A higher Sharpe Ratio indicates more efficient returns per unit of risk. This metric allows comparison between strategies with different risk profiles. However, it assumes returns are normally distributed, which may not always hold in practice. Sharpe Ratio should be evaluated alongside drawdowns and tail risk to gain a complete picture of performance. In quant investing, Sharpe Ratio guides model selection and portfolio construction by emphasizing consistency over raw returns.