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Nobel Laurete William Sharpe developed a model to measure the return earned in excess of the risk free rate (normally Treasury instruments) on a portfolio to the portfolio’s total risk as measured by standard deviation in its returns over the measurement period. The Sharpe ratio is often used to rank the risk-adjusted performance of various portfolios over the same time. The higher a Sharpe ratio, the better a portfolio’s returns have been relative to the amount of investment risk the investor has taken.

Its advantage of other models (CAPM) is that it uses the volatility of portfolio return instead of measuring the volatility against a benchmark (i.e., index). However, its disadvantage is tha it is just a number and is meaningless unless it is compared with several other types of postfolios with similar objectives.