Sharpe Ratio Calculator
Return Alone Doesn't Tell the Whole Story
Two portfolios can post the same annual return while taking on wildly different amounts of risk to get there. The Sharpe ratio, developed by economist William Sharpe, adjusts return for the volatility taken on to earn it, making it possible to compare investments on a risk-adjusted rather than a raw-return basis.
The Formula
The numerator, "excess return," is the return earned above what a risk-free asset (like a Treasury bill) would have paid. Dividing that excess return by the portfolio's standard deviation (its volatility) produces a ratio: how much extra return was earned per unit of risk taken.
Where This Is Used
- Comparing funds or strategies — a fund with a lower raw return but a higher Sharpe ratio delivered more return per unit of risk than one with a flashier headline number.
- Evaluating leverage — leveraging a strategy raises both return and volatility proportionally, so Sharpe ratio stays roughly constant even as raw returns increase.
- Portfolio construction — investors sometimes optimize a portfolio to maximize Sharpe ratio rather than raw expected return.
Interpreting the Result
| Sharpe Ratio | Interpretation |
|---|---|
| Below 0 | Poor (negative risk-adjusted return) |
| 0 to 1 | Sub-optimal |
| 1 to 2 | Good |
| 2 to 3 | Very Good |
| Above 3 | Excellent |
Example: a 10% portfolio return with a 3% risk-free rate and 8% standard deviation gives (10 − 3) ÷ 8 = 0.875 — sub-optimal, despite the double-digit headline return.
How to Use This Calculator
- Enter the Portfolio Return as a percentage.
- Enter the Risk-Free Rate (commonly a short-term Treasury yield) as a percentage.
- Enter the Portfolio Standard Deviation as a percentage.
- Select Calculate to see the Sharpe ratio and its interpretation.
Related Calculations
Measure performance against a specific benchmark with the Alpha Calculator, or check a portfolio's volatility directly with the Risk Calculator.