Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Two investments can post the identical raw return and rank completely differently once volatility enters the picture, because Sharpe ratio measures return earned per unit of risk taken, not return alone. A smoother, lower-return path can beat a higher-return but far more volatile one on a risk-adjusted basis.
Before you rely on it
What to check
Compare Sharpe ratios only across investments measured over the same time period and frequency. Mismatched periods distort the comparison without anyone changing the underlying investments.
The common error
Where people go wrong with sharpe ratio calculator
Ranking investments by raw return alone and ignoring volatility entirely. A high return achieved through wide swings can carry a lower Sharpe ratio than a steadier, lower-return alternative.
Sensitivity evidence
How portfolio annual return changes the risk-adjusted ratio
| Portfolio annual return | Risk-adjusted ratio | Excess return |
|---|---|---|
| 6.0% | 0.17× | 2.0% |
| 8.0% | 0.33× | 4.0% |
| 10.0%worked example | 0.50× | 6.0% |
| 12.0% | 0.67× | 8.0% |
| 14.0% | 0.83× | 10.0% |
Every input, tested
Which input moves the risk-adjusted ratio most
| Input | Tested from | To | Risk-adjusted ratio at each end | Swing |
|---|---|---|---|---|
| Portfolio annual return | 8.0% | 12.0% | 0.33× to 0.67× | 0.33× (67%) |
| Risk-free or benchmark return | 3.0% | 5.0% | 0.58× to 0.42× | 0.17× (33%) |
| Volatility or downside deviation | 10.0% | 14.0% | 0.60× to 0.43× | 0.17× (34%) |
Two variables at once
Risk-adjusted ratio by portfolio annual return and risk-free or benchmark return
| Portfolio annual return \ Risk-free or benchmark return | 2.0% | 4.0% | 6.0% |
|---|---|---|---|
| 6.0% | 0.33× | 0.17× | 0.00× |
| 8.0% | 0.50× | 0.33× | 0.17× |
| 10.0% | 0.67× | 0.50× | 0.33× |
| 12.0% | 0.83× | 0.67× | 0.50× |
| 14.0% | 1.00× | 0.83× | 0.67× |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Portfolio annual return | 10.0% |
| Risk-free or benchmark return | 4.0% |
| Volatility or downside deviation | 12.0% |
| Risk-adjusted ratio | 0.50× |
| Excess return | 6.0% |
Where the inputs come from
Portfolio annual return is the return of the portfolio or fund over the measurement period, risk-free or benchmark return is usually a Treasury bill yield over the same time, and volatility is the annualized standard deviation of the portfolio's returns. Use the same period for all three numbers and match units, all annual. Fund fact sheets often report all three.
When the result stops applying
Sharpe treats upside and downside swings as equally bad, penalizing a fund for large gains. It also assumes returns are roughly normally distributed, which understates tail risk in strategies that sell options or hold illiquid assets. A short or lucky period can produce a high ratio that does not repeat. Use at least three years of data.
What to compare it with
The Sortino ratio counts only downside volatility and may better match how investors feel losses. Check the maximum drawdown calculator for the worst peak-to-trough loss, and the beta and alpha pages for how the fund relates to the market. Compare funds only over the same dates.
People also ask
Frequently asked questions
What is a good Sharpe ratio?
Around 1 is considered good, above 2 very good and below 1 mediocre, but the number depends on the period and the asset class, so compare with a relevant benchmark.
What should I use as the risk-free rate?
The yield on short-term Treasury bills over the same period is the usual choice, since it is the return with almost no risk.
Can the Sharpe ratio be negative?
Yes, when the portfolio earns less than the risk-free rate. A negative ratio means you were not paid for taking risk.