Sharpe Ratio. This eponymous statistic was created by William Sharpe, one of the developers of the capital-asset pricing model (CAPM). We know that investors desire high rewards (high returns) and low risk (low volatility). The Sharpe Ratio combines both of those elements in one statistic. The numerator is the return from the strategy, or more commonly, the excess return over the three-month Treasury bill rate. The denominator is the risk or volatility of the strategy measured by the standard deviation of the returns (how variable they have been over time).
