Sharpe Ratio

The Sharpe Ratio is a measure used to evaluate the risk-adjusted return of an investment or portfolio. It is calculated by subtracting the risk-free rate of return from the expected return of the investment and then dividing that result by the standard deviation of the investment’s returns. The formula is as follows:

$$\text{Sharpe Ratio}=\frac{E[R]-R_f}{\sigma }$$

Where:

• $E[R]$ is the expected return of the investment.
• $R_f$ is the risk-free rate of return.
• $\sigma$ is the standard deviation of the investment’s returns.