The Sharpe Ratio is a well-known measure of risk-adjusted return. It’s found by subtracting the risk-free rate from the return of an asset or portfolio, and then dividing the result by the standard deviation of the asset or portfolio.

In doing so, we are essentially finding how much more than the risk-free rate the asset returned and then dividing that by the assets risk as measured by its standard deviation. Obviously large Sharpe ratios are preferable as they indicate more units of return (above the risk-free rate) per unit of risk incurred by investing in the asset or portfolio.