Sharpe Ratio

Sharpe Ratio - A statistic that measures risk-adjusted return. The Sharpe Ratio is calculated by taking the strategy’s excess return (return above the risk-free rate) and dividing it by the standard deviation of those returns (volatility). In backtesting, a higher Sharpe Ratio indicates the strategy earned more return per unit of risk (variability) – in other words, it had smoother, more reliable performance for its level of return. This metric allows comparison of strategies: for example, between two EAs with similar returns, the one with the higher Sharpe is considered better because it achieved those returns with less volatility.