### Sharpe Ratio

The Sharpe Ratio, invented by William Forsyth Sharpe is also known as the Sharpe Performance Index. It is a measure of reward (or excess return) per unit of risk.

Sharpe Ratio = (Average Returns of Portfolio - Average Risk Free Rate) / Standard Deviation

The formula uses standard deviation as the unit of risk. Reward (or excess returns) is measured as the difference between the portfolio's return and the risk-free rate of return over a period. The higher the Sharpe Ratio, the better the portfolio's performance. It is important to know that a portfolio can achieve higher returns by taking on additional risks. The Sharpe's Ratio allows us to determine whether the higher returns come from better performance or from additional risks.

The Sharpe Ratio is quite similar to the Treynor Performance Index in the sense that it measures excess return per unit of risk. The difference is in the definition of risk. Treynor Performance Index uses Beta while Sharpe Ratio uses Standard Deviation. The Treynor Performance Index is suitable for investors who have diversified across funds while the Sharpe Ratio is suitable for investors who put their money in only one or two funds.

#### SharpeRatio Worksheet

This worksheet first calculates the Average Annual Returns of a portfolio and the Standard Deviation based on the Portfolio Returns over a 5 year period. It can be easily expanded to 10 year period if required. The following formula is then applied

Sharpe Ratio = (Average Returns of Portfolio - Average Risk Free Rate) / Standard Deviation #### SharpeMultiplePortfolios Worksheet

The SharpeMultiplePortfolios worksheet calculates the Sharpe Ratio for up to 5 portfolios. Inputs

• Rp - Average rate of return for a portfolio during a period
• Rf - Average rate of return on a risk free investment during a period
• sd - Standard deviation of the rate of return for the portfolio during a period
Outputs

• S - Porfolio's risk premium return earned per unit of total risk

System Requirements

Microsoft® Windows 7, Windows 8 or Windows 10
Windows Server 2003, 2008, 2012, 2016 or 365
512 MB RAM
5 MB of Hard Disk space
Excel 2007, 2010, 2013 or 2016

FreeSharpeRatio.zip (Zip Format - 91 KB)

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