What this calculator does
A high return means little without knowing how much volatility was endured to get it. The Sharpe ratio divides the excess return over the risk-free rate by the standard deviation, giving reward per unit of risk.
It makes otherwise incomparable portfolios comparable. An 8 per cent excess return earned with 10 per cent volatility scores 0.80, while the same 8 per cent earned with 25 per cent volatility scores only 0.32, and the second investor took three times the ride for the same destination.
The formula
Subtract the risk-free rate from the portfolio return, then divide by the standard deviation of returns. All three should cover the same period.
| Term | Meaning |
|---|---|
| Excess return | Portfolio return less the risk-free rate, the reward for taking risk at all. |
| Standard deviation | How much returns have varied around their average, used here as the risk measure. |
| Sharpe ratio | Excess return per unit of volatility. Above 1 is generally considered good. |
The inputs explained
| Field | What to enter |
|---|---|
| Portfolio (or asset) return (%) | The portfolio or asset return over the period, as a percentage. |
| Risk-free rate (%) | The risk-free rate over the same period. |
| Standard deviation of returns (%) | The standard deviation of the portfolio's returns, as a percentage. |
When to use it
Comparing two funds
The higher-returning fund is not necessarily better once volatility is accounted for.
Assessing whether leverage helped
Leverage raises both return and volatility, so it should leave the Sharpe ratio broadly unchanged.
Reviewing your own portfolio
Tracking the ratio over time shows whether extra risk is actually being rewarded.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much does volatility cost the ratio?
The same excess return earned with three levels of volatility.
Questions
What is a good Sharpe ratio?
Above 1 is generally considered good and above 2 very strong, though the figure depends heavily on the period measured. Ratios calculated over short or unusually calm periods tend to flatter.
Why is standard deviation used as the risk measure?
Because it is simple to calculate and captures how much returns bounce around. Its weakness is that it treats upside and downside volatility identically, which few investors actually do.
What is the Sortino ratio?
A variant that uses only downside deviation in the denominator, on the reasoning that investors do not mind upside surprises. It often gives a more intuitive picture for asymmetric strategies.
Can the Sharpe ratio be gamed?
To a degree, yes. Strategies that produce small steady gains with rare large losses, such as selling options, can post excellent ratios right up until the loss arrives. The ratio does not capture tail risk.
For the return risk theoretically requires, see the CAPM calculator. For a plain return measure, see the return on investment calculator.