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Computing portfolio Sharpe ratios

Computing portfolio Sharpe ratios - Microsoft Excel Tutorial

From the course: Excel for Investment Professionals

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Computing portfolio Sharpe ratios

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- [Man] One of the most common tools that's used in valuating a portfolio is what's called the Sharpe ratio. Sharpe ratio, in essence, lets us go through and examine whether a portfolio is adding value relative to the level of risk it's taking on. I'm in the 05_04_Begin Excel file. Now the Sharpe ratio is simply the return of the portfolio, minus the risk-free rate, all divided by the standard deviation. In essence, it's a metric which tells us are we adding value over and above the risk-free rate relative to the level of risk we're taking on. Higher Sharpe ratios are better. In order to calculate this in Excel, we're simply going to go through and create a new column labeled Rp minus Rf. Now the return on the portfolio Rp is here in collum B, so I'm going to take the collum B metic, minus the risk-free rate, and we're going to extend this across the entire 12 month timeframe. Now in order to calculate our Sharpe ratio, we're going to use the average of these 12 months, divided by the…

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