The Sharpe ratio is a measure of risk-adjusted performance that indicates the level of excess return per unit of risk. In the calculation of Sharpe ratio, excess return is the return over and above the short-term, risk-free rate of return and this figure is divided by the risk, which is represented by the annualized volatility or standard deviation.

In summary, the Sharpe Ratio is equal to the compound annual rate of return minus rate of return on a risk–free investment divided by the annualized monthly standard deviation. The higher the Sharpe ratio, the higher the risk-adjusted return. If 10-year treasury bonds are yielding 2%, and two Forex managed account programs have the same performance at the end of each month, the Forex managed account program with the lowest intra-month P&L volatility will have the higher sharp ratio.