What is the Sharpe ratio?

What is the Sharpe ratio?

Approach: Define formula and interpretation.

(R_p - R_f)/σ_p, where R_p is portfolio return, R_f is risk-free rate, σ_p is portfolio standard deviation. Measures excess return per unit of risk.

Follow-up: What are its limitations?

Key concepts: excess return, volatility, risk-adjusted.