History
In 1952, A. D. Roy suggested maximizing the ratio "(m-d)/σ", where m is expected gross return, d is some "disaster level" (a.k.a., minimum acceptable return) and σ is standard deviation of returns. This ratio is just the Sharpe ratio, only using minimum acceptable return instead of excess return in the numerator, and using standard deviation of returns instead of standard deviation of excess returns in the denominator.
In 1966, William Forsyth Sharpe developed what is now known as the Sharpe ratio. Sharpe originally called it the "reward-to-variability" ratio before it began being called the Sharpe ratio by later academics and financial operators. The definition was:
Sharpe's 1994 revision acknowledged that the basis of comparison should be an applicable benchmark, which changes with time. After this revision, the definition is:
Note, if Rf is a constant risk-free return throughout the period,
Recently, the (original) Sharpe ratio has often been challenged with regard to its appropriateness as a fund performance measure during evaluation periods of declining markets.
Read more about this topic: Sharpe Ratio
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