# Sharpe Ratio Formula

## 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:

${Sharpe\:Ratio}={{\bar{r}_p\:-\:r_f}\over\sigma_p}$

$$\bar{r}_p$$ = expected return of the portfolio or investment
$$r_f$$ = risk-free interest rate
$$\sigma_p$$ = standard deviation of portfolio returns

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