# Sharpe-Ratio

The **Sharpe-Ratio** is a key figure for measuring the risk-return ratio of a capital investment. It is named after the economist William F. Sharpe, who first introduced it in 1966.

The Sharpe-Ratio is calculated as follows:*Sharpe-Ratio = (return on investment - risk-free return) / **volatility** of the investment*

A "risk-free return" corresponds to a return on a very low-risk investment, such as a government bond.

The Sharpe-Ratio can be calculated both for individual investments and for portfolios of investments. It is often used to compare the performance of funds or asset classes.

It is also an important indicator for investors as it helps them to make risk-conscious investment decisions. A high Sharpe-Ratio is an indication that an investment has offered a good return with an acceptable level of risk in the past. A low Sharpe-Ratio means that the investment's return was accompanied by a high level of risk.

An example:

An investment achieves a return of 10 % per year, while the risk-free interest rate is 2 % per year. The volatility of the investment is 15%. The Sharpe-Ratio of this investment is then 0.67.

This means that the investment achieves an excess return of 8 % per year (10 % - 2 %), which is accompanied by a volatility of 15 %. This is a high-risk investment, as the fluctuation in value is greater than the excess return.

The higher the Sharpe-Ratio, the better the historical performance of the investment, taking into account the risk taken.