Performance Metrics

Core Concepts

Sharpe Ratio

The most widely used risk-adjusted performance measure. It divides excess return (over the risk-free rate) by total volatility.

SR = (R_p - R_f) / sigma_p

• R_p: annualized portfolio return
• R_f: annualized risk-free rate
• sigma_p: annualized portfolio volatility (standard deviation of returns)

A higher Sharpe ratio indicates more return per unit of total risk. Typical benchmarks: SR < 0.5 is poor, 0.5-1.0 is acceptable, > 1.0 is strong, > 2.0 is exceptional.

Annualization: If computed from monthly data, SR_annual = SR_monthly * sqrt(12).