Sharpe ratio
The Sharpe ratio divides the return earned above the risk-free rate by the volatility of returns: the return per unit of risk.
Proposed by William Sharpe, it is calculated as follows: (portfolio return − risk-free rate) ÷ standard deviation of returns. The higher it is, the smaller the swings needed to earn the return.
It lets you compare two strategies with similar returns: the one that gets there with a steadier equity curve will have the better Sharpe.
Its limits: it treats upside and downside swings the same way, and assumes fairly regular returns. A strategy that sells options or uses martingale can show a flattering Sharpe right up to the sudden loss. Always pair it with maximum drawdown.