Sharpe Ratio

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The Sharpe Ratio is a measure of risk-adjusted return that evaluates the performance of an investment or portfolio relative to its level of risk or volatility. The Sharpe Ratio is calculated by subtracting the risk-free rate of return from the investment’s average return and dividing the result by the investment’s standard deviation or volatility. A higher Sharpe Ratio indicates better risk-adjusted performance, with higher returns relative to the level of risk taken, while a lower Sharpe Ratio suggests inferior performance given the level of risk.