Glossary term
Sharpe ratio
Sharpe ratio compares excess return with volatility in a simplified risk-adjusted return calculation.
Plain meaning
What Sharpe ratio means
Sharpe ratio is often calculated as portfolio return minus risk-free rate, divided by volatility. It expresses excess return per unit of volatility under the model assumptions.
Formula role
How OpenBook uses it
OpenBook's Sharpe ratio calculator uses the entered return, risk-free rate, and volatility. If volatility is zero, the ratio is unavailable because the denominator is zero.
Common boundary
Why it is only one risk lens
Sharpe ratio is a statistical summary, not a complete risk assessment. It does not directly show drawdowns, tax effects, concentration, liquidity, currency risk, sequence risk, or whether volatility is an appropriate risk measure for the purpose being tested.