## Sharpe Ratio Formula Explained

Sharpe ratio is excess return divided by risk.

**Excess return** is the return on the investment (portfolio, fund, trading strategy) less risk-free return (treasury yield, money market rate).

**Risk** is represented by the standard deviation of returns on the investment.

Therefore, Sharpe ratio equals expected return on the investment less risk-free rate, divided by standard deviation of returns on the investment:

... where:

*R _{p}* = expected return of the portfolio or investment

*R*= risk-free interest rate

_{f}*σ*= standard deviation of portfolio returns

_{p}