Sharpe Ratio Calculator
Measure risk-adjusted return. Higher Sharpe = better return per unit of risk.
Understanding Sharpe Ratio
What is Sharpe Ratio?
The Sharpe Ratio, developed by William F. Sharpe in 1966, measures risk-adjusted return. It tells you how much excess return you receive for the extra volatility of taking on additional risk. A higher Sharpe Ratio means better risk-adjusted performance.
Formula
Sharpe Ratio = (Rp - Rf) / σp
Sharpe Ratio = (Rp - Rf) / σp, where Rp is portfolio return, Rf is risk-free rate, and σp is portfolio standard deviation.
Interpretation Guide
| Range | Rating | Meaning |
|---|---|---|
| ≥ 2.0 | Excellent (>2.0) | Excellent. Rare in practice. Exceptional risk-adjusted performance. |
| 1.0 - 2.0 | Good (1.0-2.0) | Good to very good. The strategy has favorable risk-adjusted returns. |
| 0.5 - 1.0 | Acceptable (0.5-1.0) | Positive but mediocre. The strategy generates return but not enough for the risk taken. |
| < 0.5 | Poor (<0.5) | Risk-adjusted return is negative. Strategy is underperforming the risk-free rate. |
Frequently Asked Questions
What is Sharpe Ratio?
Sharpe Ratio measures how much excess return you receive for the extra volatility of taking on additional risk.
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What is this tool?
Sharpe Ratio measures risk-adjusted return of an investment by comparing excess return to volatility. Sharpe = (Return - Risk-Free Rate) / Standard Deviation. A higher Sharpe ratio indicates better return per unit of risk. Values above 1 are considered good, above 2 very good, and above 3 excellent. Named after Nobel laureate William Sharpe.
How to use
- 1
Enter investment return
Input the annualized return of your investment.
- 2
Enter risk-free rate
Input the risk-free rate (e.g., government bond yield).
- 3
Enter standard deviation
Input the annualized volatility (standard deviation) of returns.
- 4
View Sharpe ratio
See Sharpe ratio and risk-adjusted performance evaluation.
Frequently Asked Questions
What is a good Sharpe ratio?
Sharpe > 3 is excellent, > 2 is very good, > 1 is acceptable, and < 1 is poor. However, context matters—a long/short hedge fund with Sharpe 1.5 may be great, while an index fund with Sharpe 0.8 may be disappointing.
What are the limitations of Sharpe ratio?
Sharpe ratio assumes returns are normally distributed and penalizes upside volatility the same as downside. It cannot predict future performance and may be misleading for strategies with fat-tailed or skewed return distributions. Use alongside Sortino ratio and max drawdown.
How is Sharpe ratio calculated?
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation of Portfolio Return. For example, if a portfolio returns 12% annually with 15% standard deviation and the risk-free rate is 3%: Sharpe = (12% - 3%) / 15% = 0.60. The returns and standard deviation should be annualized. A Sharpe above 1.0 is acceptable, above 2.0 is good, and above 3.0 is excellent.