Sharpe ratio = (Portfolio return - Risk-free return) / Standard deviation of the 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 returns.
• A higher Sharpe ratio indicates better risk-adjusted performance.
• Standard deviation is a measure of the dispersion of returns around the average return of a portfolio.
• The risk-free rate is the return on an investment with zero risk, typically represented by government bonds.
• Sharpe ratio helps investors understand the return they are receiving for the amount of risk they are taking.