Absolute returns and volatility are important in their own right, but when they’re put together they yield the Sharpe ratio, which is an equally important metric for investors to consider. Remember that by dividing the absolute returns9 by the volatility, we can calibrate the returns for the risk taken. The higher the Sharpe ratio, the more the asset is compensating investors for the risk. This is an extremely important metric in the context of modern portfolio theory, because while an aggressive investor may salivate over sexy returns, the innovative investor is equally aware of the risk
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