Learn How to Calculate Sharpe Ratio - Tutorial

How to Calculate Sharpe Ratio - Definition, Formula, Example

Definition:

It is a method, which is used to measure the fund's risk-adjusted return on an investment. This tutorial explains how to calculate the Sharpe Ratio S(x).

Formula:

S(x) = (Expected portfolio return - Risk free rate) / Portfolio standard deviation Where, S(x) = Sharpe Ratio
Example :

A manager generates a return of 15% with the risk free-rate of 5%, and a manager's portfolio has a standard deviation of 8%, then find the sharpe ratio for manager portfolio?

Given,

Expected portfolio return= 15%, Risk free rate= 5% Portfolio standard deviation = 8%

To Find,

S(x)

Solution :

Substitute the given values in the formula,

S(x) = (Expected portfolio return - Risk free rate) / Portfolio standard deviation
=(15-5)/8
=(10)/8
=1.25

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