Glossary › Sharpe Ratio
Sharpe Ratio
Excess return per unit of total volatility — a 'reward per risk' measure where risk = standard deviation.
Formula
Sharpe = (annualised return − risk-free rate) / annualised standard deviation of returns
Intuition
Sharpe asks: for every unit of volatility you stomached, how much extra return (over the risk-free rate) did you actually receive? Higher is better. A Sharpe of 1.0 means one percentage point of excess return per percentage point of annualised volatility.
What to look for
Above 1.0 is generally considered solid for an Indian equity fund over a 3-year window; above 1.5 is strong; above 2.0 is rare. Comparing across asset classes is misleading.
Caveats
Sharpe treats upside and downside volatility identically. A fund with violent positive moves has the same Sharpe penalty as a fund with violent negative moves — which is why Sortino exists. Lens uses a 6% annualised risk-free rate and 252 trading days for annualisation.