## What Is The Sharpe Ratio?

The “excess return” is the expected return of an investment minus the expected return of a so-called risk-free, guaranteed investment return.

For example, if you expect an investment or a portfolio to have a mean return of 9% and a standard deviation of 12% in an environment where a so-called risk-free, guaranteed investment has a return of 3%, that investment or portfolio’s Sharpe Ratio would be 0.5. The calculation is simply (9% – 3%) / 12%.

The Sharpe ratio is a quick measure that tries to answer the question, “Am I getting enough extra return for my extra risk?”