Sharpe ratio

The Sharpe Ratio measures how much extra return you get for taking on extra risk - like how much "bang for your buck" you are getting for investing in something. Imagine you have two investments: Investment A that is super safe and gives you a 3% return and Investment B that is riskier and gives you a 4% return. The Sharpe Ratio helps you understand which investment is better - even though Investment B has a higher return, if it's too risky then it may not be worth it. The Sharpe Ratio measures the difference between the returns of the two investments and compares them to the amount of extra risk that Investment B takes on. If Investment B gets you a lot more return for the same amount of risk, then it has a higher Sharpe Ratio and is a better choice for investing.