Sharpe ratio

Excess return divided by volatility. How much return was earned per unit of risk taken.

A portfolio returning 18.4% against a 7% risk-free rate with 22% volatility scores 0.52.

It's the most widely used risk-adjusted measure and it has known weaknesses. It penalises upside volatility equally with downside. Strategies that sell insurance, collecting small premiums until the rare large loss arrives, can improve it. It's also unstable over short samples.

Compare Sharpe ratios only over identical periods, and treat anything above two with suspicion, however admirable it looks.

One trap is worth naming because it's common in marketing material. A strategy that sells insurance, collecting small premiums until a rare large loss arrives, posts an excellent ratio right up until the loss. Volatility isn't the same as risk of ruin, and the ratio can't see the difference.