Sharpe Ratio
The Sharpe Ratio measures risk-adjusted return by dividing excess return above the risk-free rate by return volatility, enabling comparison across investments with different risk profiles.
| Sharpe Ratio Formula | Component |
| Numerator | Portfolio return minus risk-free rate |
| Denominator | Standard deviation of returns |
| Risk-free rate | 3% to 5% (UAE/US treasuries) |
| Return volatility | Historical standard deviation |
| Interpretation | Higher ratio = better risk-adjusted performance |
| Threshold | Above 1.0 considered good, above 2.0 excellent |
| Example Calculation | Real Estate Fund |
| Average annual return | 12% |
| Risk-free rate | 4% |
| Excess return | 8% (12% minus 4%) |
| Return standard deviation | 10% |
| Sharpe Ratio | 0.8 (8% / 10%) |
| Interpretation | Delivers 0.8% excess return per 1% volatility |
| Benchmark comparison | Compare to REIT or core fund Sharpe |
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