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Sharpe Ratio

Sharpe ratio measures excess return per unit of total risk.

The Sharpe ratio measures risk-adjusted performance by comparing excess return over a risk-free rate to total volatility. It is widely used in portfolio management, trading evaluation, and investment analysis.

For example, an oil trading fund generating returns above the risk-free rate with low price volatility will have a high Sharpe ratio, indicating efficient risk-reward management. Conversely, high volatility reduces the ratio, signaling less attractive risk-adjusted performance.

Traders use the Sharpe ratio to compare strategies, assess hedging effectiveness, and optimize portfolio allocation. It supports decision-making by highlighting whether returns adequately compensate for exposure to risk.

The ratio is valuable in commodities, equities, and derivative markets, helping participants identify consistent, risk-efficient trading opportunities and improve long-term financial outcomes.