Sharpe ratio

Excess return over the risk-free rate divided by the standard deviation of returns. It measures reward per unit of total risk.

Where you will meet it

Sharpe ratio comes up in 16 learning outcome notes across the FRM syllabus. A few of them:

• Fund Management
  FRM Part I · Financial markets and products

  “Smoothed or stale valuations of illiquid assets understate volatility and correlation and overstate the Sharpe ratio.”

• The Building Blocks of Risk Management
  FRM Part I · Foundations of risk management

  “Performance should therefore be judged per unit of risk, for example with the Sharpe ratio, or with risk-adjusted capital measures.”

• Measures of Financial Risk
  FRM Part I · Valuation and risk models

  “With a risk-free asset, the best risky mix is the tangency portfolio, which has the highest Sharpe ratio.”

• Factors
  FRM Part II · Risk management and investment management

  “The two strategies tend to be negatively correlated, so combining them diversifies and raises the Sharpe ratio above either alone.”

See also

Risk-free rate · Standard deviation

All terms beginning with S · FRM glossary

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