If you have exactly the same average daily return rates with your classmate, and your classmate's Sharpe Ratio is higher, this means that his/her portfolio is less volatile; in other words, his/her portfolio is taking less risk.

Given the same return, less risk is definitely more desirable -- if a  term deposit's rate were exactly the same as the return rate of the S&P index, you would put it in a term deposit rather than on the stock market, right?  The reason is that from a term deposit you always reap the return, hence a less volatile and less risky instrument than the stock market, so if both have the same rate, you are much better off investing in a term deposit.

Taking into account risk in this way is what risk-adjusted means in the standard definition of Sharpe Ratio.

If you want to learn more about Sharpe Ratio, refer to the article on Sharpe Ratio.

Negative Return

Sharpe Ratio is only positive if your return is more than the safest instrument available (this is the risk-free rate in the standard definition of Sharpe Ratio).

This means that if my return is so low that it is essentially the same as what the U.S. Treasury bills are paying out, then my return isn’t very good.  In fact, Sharpe Ratio is 0 if your return rate is exactly the same as the U.S. Treasury bills’ rate.

If you want to learn more about Sharpe Ratio, refer to the article on Sharpe Ratio.

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