Investing is always about finding a balance between risk and return. Risk is the probability that an investment will not yield the expected return, while return is the profit that an investor can expect from the capital invested. This relationship between risk and return is a fundamental factor in any investment decision. The objective of each investor is to find the optimal balance that fits their objectives and risk tolerance. It is in this respect that an indicator called the Sharpe ratio helps us.

The Sharpe ratio is an indicator developed by economist Michael Sharpe in 1966 to measure the risk-adjusted return of an investment. This ratio is a key tool for assessing how efficient an investment is in relation to the risk taken. Using the Sharpe ratio, investors can see what return is achieved for each unit of risk they take. This ratio is therefore very useful for comparing different investments and optimising a portfolio.

The Sharpe ratio (SSS) is calculated using the following…