Risk & returns
The Sharpe ratio divides average excess return by return volatility. It summarises reward per unit of measured variability under strong assumptions and a selected period.
Make it click
Two routes gain distance beyond a safe baseline. Divide that extra progress by how much each journey wobbled to form a compact efficiency comparison.
Now put that into markets
The numerator uses return above a risk-free or reference rate; the denominator is standard deviation. Frequency and annualisation conventions must align.
The ratio is sensitive to sample, smoothing, leverage, serial correlation and non-normal returns. Confidence intervals can be wide.
Rebuild the inputs and inspect drawdowns and distribution. Compare similar strategies over the same period with realistic net returns.
A high ratio can be engineered by selling rare tail risk or smoothing illiquid prices. It is not a complete measure of safety or skill.
Takeaway
