Sharpe Ratio Calculator

What is the Sharpe ratio?

The Sharpe ratio measures risk-adjusted return. It shows how much excess return a portfolio earns for each unit of total volatility. Nobel laureate William F. Sharpe introduced the measure to help investors compare strategies with different return and risk profiles on equal footing.

Pair Sharpe ratio with systematic risk metrics from the portfolio beta calculator. To estimate expected return from beta under CAPM, use the expected return calculator. To review raw performance over a holding period, try the rate of return calculator. To measure worst peak-to-trough loss, use the maximum drawdown calculator. To estimate maximum expected loss at a confidence level, try the value at risk calculator. When downside volatility matters more than total volatility, compare results with the Sortino ratio calculator.

Sharpe ratio formula

Where $R_p$ is the expected or realized portfolio return, $R_f$ is the risk-free rate, and $\sigma_p$ is the standard deviation (volatility) of portfolio returns. All three inputs should use the same time period, typically annualized percentages.

Worked example

Suppose a portfolio has an expected return of 12%, a risk-free rate of 4%, and annualized volatility of 10%. Excess return equals 12% minus 4%, or 8%. Sharpe ratio equals 8% divided by 10%, which is 0.80. A ratio below 1.0 is often considered sub-optimal on a risk-adjusted basis, though context and asset class matter.

How to interpret Sharpe ratio values

• Below 0: The portfolio underperformed the risk-free rate after adjusting for volatility.
• 0 to 1.0: Positive excess return, but modest compensation per unit of risk.
• 1.0 to 2.0: Generally considered good risk-adjusted performance for many equity strategies.
• 2.0 to 3.0: Very strong risk-adjusted returns, often seen in concentrated or alternative strategies.
• 3.0 or higher: Excellent, but verify data quality and survivorship bias before comparing managers.

Practical tips when using Sharpe ratio

• Use the same measurement window for return, risk-free rate, and volatility. Mixing monthly returns with annualized volatility distorts the ratio.
• Short-term US Treasury bill yields are a common proxy for the risk-free rate in US dollar portfolios.
• Sharpe ratio penalizes upside and downside volatility equally. Strategies with large positive swings may look worse than they feel to investors focused on downside only.
• Compare Sharpe ratios only among strategies with similar assumptions, fees, and liquidity constraints.

Frequently asked questions