Cognitive Scaffold

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MENTAL MODEL · M1803

Sharpe Ratio

Sharpe Ratio
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

A measure of risk-adjusted return. Formula: (Investment return - Risk-free rate) / Standard deviation (volatility).

SCAFFOLDING EFFECT

psychology

Reduce cognitive load

- Performance debunking: If two funds both earn 20%, Fund A rises steadily (high Sharpe), Fund B fluctuates wildly (low Sharpe), A is far superior to B. Don't just look at returns without considering the risk taken to achieve them.

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Anchor fast decisions

The Sharpe ratio is calculated by dividing the difference between the investment return and the risk-free rate by the standard deviation of returns. It measures the excess return per unit of total risk. It ties returns to volatility, allowing comparison of strategies with different risk levels.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Sharpe_ratioZH · Explicit
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