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Definition

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.