Sharpe ratio = (Portfolio return - Risk-free return) / Standard deviation of portfolio = (22% - 6%) / 15% = 1.07

Things to Remember

• The Sharpe ratio is a measure of risk-adjusted return, calculated by subtracting the risk-free rate of return from the portfolio's return and dividing the result by the standard deviation of the portfolio's return.
• A higher Sharpe ratio indicates better risk-adjusted performance, as the portfolio is generating more return per unit of risk taken.
• Investors use the Sharpe ratio to compare the risk-adjusted returns of different investment strategies or portfolios.
• The Sharpe ratio helps investors understand how much excess return they are receiving for the extra volatility they are exposed to by holding a riskier asset.
• It is important to note that the Sharpe ratio assumes that returns are normally distributed, which may not always be the case in reality.