The Sharpe ratio is a well-known and well-reputed measure of risk-adjusted return on investment, developed by William Sharpe. The Sharpe ratio can be used to evaluate the total performance of an investment portfolio or the performance of an individual stock. The Sharpe ratio indicates how well an equity investment performs in comparison to the rate of return on a risk-free investment, such as U.S. government treasury bonds or bills. There is some disagreement as to whether the rate of return on the shortest maturity treasury bill should be used in the calculation or whether the risk-free instrument chosen should more closely match the length of time that an investor expects to hold the equity investments.


Source : Investopedia