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What does Sharpe Ratio mean?
The Sharpe ratio is used to compare the change in a portfolio's overall risk-return and was developed by Nobel laureate William F. Sharpe. It has become the most widely used method for calculating the risk-adjusted return.
Sharpe Ratio = (Expected portfolio return - Risk free rate) / Portfolio standard deviation
A financial asset has an expected return of 8%, the risk-free rate is 2%. Also, the standard deviation of the asset's excess return is 10%, as per the formula the Sharpe Ratio will be:-