A measure of a portfolio’s risk-adjusted performance, i.e., a measure of a portfolio’s excess return relative to the total variability of the portfolio. The Sharpe ratio indicates whether a portfolio’s return is due to smart investment decisions or due to excess risk. It is calculated by subtracting the risk free rate from the portfolio’s return and dividing the result with the standard deviation of the portfolio. A portfolio with a higher ratio is less risky than one with a lower ratio.