What is the Sharpe ratio formula?

The Sharpe Ratio formula is the expected portfolio return minus the risk-free rate, divided by the standard deviation of portfolio returns. It provides the investor with an idea of how much additional return is received in return for holding riskier assets.

The formula was developed by William F. Sharpe to adjust performance for risk and is popular due to its simplicity. The average rate of return is measured at a normally distributed frequency, which may be daily, monthly, or annually. Caution is taken to ensure that the formula is only applied to portfolio return rates that are normally distributed and that the risk-free rate chosen matches the portfolio's duration.