Sharpe Ratio and Standard Deviation Explained — Reading Mutual Fund Risk Metrics

Standard Deviation and Sharpe Ratio are the two most common risk metrics shown on a mutual fund factsheet. Together, they tell you not just how much a fund returned, but how much risk it took to get there.

Standard Deviation — How Much Returns Swing

Standard Deviation measures the volatility of a fund's monthly returns around its average. A fund with 8% standard deviation has calmer, more predictable returns than one with 20% — even if both have the same average return.

Sharpe Ratio — Return Per Unit of Risk

Sharpe Ratio = (Fund Return − Risk-Free Rate) ÷ Standard Deviation

A higher Sharpe Ratio means the fund is generating more return for each unit of risk taken. Two funds can have identical returns, but the one with the higher Sharpe Ratio achieved it more efficiently, with less volatility.

Fund B delivered better risk-adjusted returns despite the lower headline number — this is exactly why looking only at trailing returns and ignoring risk metrics can lead to a false comparison.

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