Sharpe Ratio Calculator
Calculate risk-adjusted returns to evaluate investment performance
Calculate Sharpe Ratio
The Sharpe Ratio Formula
Rp = Portfolio Return
Rf = Risk-Free Rate
σp = Portfolio Standard Deviation
Interpretation Guide
What is the Sharpe Ratio?
The Sharpe ratio, developed by Nobel laureate William F. Sharpe, measures the risk-adjusted return of an investment. It tells you how much excess return you receive for the extra volatility you endure for holding a riskier asset.
A higher Sharpe ratio indicates better risk-adjusted performance. This metric is essential for comparing investments with different risk profiles, as raw returns don't account for the risk taken to achieve them.
Example Calculations
S&P 500 Index
Return: 10%
Risk-Free: 4.5%
Std Dev: 15%
Balanced Portfolio
Return: 8%
Risk-Free: 4.5%
Std Dev: 8%
Hedge Fund
Return: 15%
Risk-Free: 4.5%
Std Dev: 8%
How to Improve Your Sharpe Ratio
Diversification
Spread investments across uncorrelated assets to reduce portfolio volatility without sacrificing returns.
Asset Allocation
Optimize the mix of stocks, bonds, and alternatives based on your risk tolerance and market conditions.
Factor Exposure
Tilt towards factors like value, momentum, and quality that have historically delivered risk-adjusted returns.
Risk Management
Use stop-losses, position sizing, and hedging strategies to control downside risk.
Limitations of Sharpe Ratio
Assumes Normal Distribution
Sharpe ratio doesn't account for skewness or fat tails in return distributions.
Penalizes Upside Volatility
It treats upside and downside volatility equally, though investors prefer upside.
Time Period Dependent
Results vary significantly based on the measurement period chosen.
Backward Looking
Historical Sharpe ratios may not predict future risk-adjusted performance.
Analyze Your Portfolio
Use our tools to optimize your portfolio's risk-adjusted returns.
Frequently Asked Questions
What is a good Sharpe ratio?
A Sharpe ratio above 1.0 is considered good, above 2.0 is very good, and above 3.0 is excellent. A ratio below 1.0 means the investment is not generating enough return for the risk taken. Most mutual funds have Sharpe ratios between 0.5 and 1.5.
How do you calculate Sharpe ratio?
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Standard Deviation. The risk-free rate is typically the yield on Treasury bonds. Standard deviation measures the volatility of returns.
What is the risk-free rate?
The risk-free rate is the return on an investment with zero risk, typically represented by government Treasury bonds. In 2024, this is around 4-5% for US Treasury bills. Use the rate matching your investment time horizon.
Can Sharpe ratio be negative?
Yes, a negative Sharpe ratio occurs when the portfolio return is lower than the risk-free rate. This indicates the investment would have been better off in risk-free assets like Treasury bonds.
What is the difference between Sharpe and Sortino ratio?
Both measure risk-adjusted returns, but Sortino ratio only considers downside volatility (negative returns), while Sharpe ratio uses total volatility. Sortino is often preferred because investors typically only care about downside risk.