Comment on the following: Sharpe ratio is a risk adjusted measure of return to evaluate the performance of a portfolio.

The Sharpe ratio is a risk-adjusted measure of return that is often used to evaluate the performance of a portfolio. The ratio helps to make the performance of one portfolio comparable to that of another portfolio by making an adjustment for risk. Mathematically, Sharpe ratio is defined as: S(X) = (r x - R f )/ Std Dev (X) Where X = Investment r x = Average rate of return of x R f = Best available rate of return of risk free security Std Dev (X) = Standard deviation of r x The Sharpe ratio is quite simple. It's broken down into just three components: asset return, risk-free return and standard deviation of return. After calculating the excess return, it's divided by the standard deviation of the risky asset to get its Sharpe ratio. The idea of the ratio is to see how much additional return investor is receiving for the additional volatility of holding the risky asset over a risk-free asset - the higher the better.