Sharpe Ratio: A measure of a fund’s return relative to its risk. The return (numerator) is defined as the fund’s incremental average return over the risk-free rate. The risk (denominator) is defined as the standard deviation of the fund’s returns.
Investors who are required to select and monitor investment managers should develop a basic understanding of investment statistics. Quantitative tools can provide you with good insight that you can use in your qualitative interviews with managers and when monitoring your investments.