How to Calculate a Risk Adjusted Return

How to Calculate a Risk Adjusted Return
Calculate risk adjusted return using the Sharpe Ratio.

Determine the average return on your portfolio. This is stated on your account statement. If you have experienced a gain, the return is positive; if you have experienced a loss, the return will be negative. Let's say the account statement shows the account has grown 8.5 percent.

Determine the risk-free rate. This is the rate at which investments that are risk-free pay. In general, investment professionals agree that the return on a six- or twelve-month U.S. Treasury bill is the risk-free rate of return. Let's say the risk free rate is 3 percent.

Determine the standard deviation of your portfolio. For this you can use MS Excel. In column A list 10 values of your portfolio from 10 different account statements. In Cell A11 insert the following formula: "STDEV(A1,A2,...A10). Let's say the standard deviation is 5.

Calculate the risk adjusted rate of return. Subtract the risk-free rate from the average portfolio rate of return and divide by the standard deviation of the portfolio. The calculation is: (8.5 percent - 3 percent) / 5 = 0.011 or 1.1 percent.