Sharpe ratio

From The Free Forex Encyclopedia

Derived by William Sharpe in 1966, the Sharpe ratio describes how much excess return you receive for the added volatility that you tolerate for holding on to a risky asset.

It is calculated this way:

S(x) = (rx-Rf)/StdDev(x)

where:

x = investment

rx= ave. rate of return of x

Rf= best available rate of return of a risk-free security (ie. Currencies)

StdDev (x) = standard deviation of rx

Robopip uses the Sharpe ratio to measure the risk tolerance of a system.

It helps him solve for the additional compensation above a certain level that the system should yield for each additional unit of risk. Basically, the higher the ratio, the better the system is.