Sharpe Ratio Calculator

The Sharpe Ratio measures the risk-adjusted return of an investment. It tells you how much excess return (above the risk-free rate) you receive for each unit of volatility you take on. A higher Sharpe Ratio indicates a more attractive investment on a risk-adjusted basis.

The Sharpe Ratio is calculated as: Sharpe Ratio = (Ra − Rf) / σ, where Ra is the portfolio return, Rf is the risk-free rate, and σ (sigma) is the standard deviation of the portfolio's excess returns. The numerator (Ra − Rf) is known as the risk premium.

Generally, a Sharpe Ratio below 1 is considered poor, between 1 and 2 is acceptable to good, between 2 and 3 is very good, and above 3 is considered excellent. However, context matters — always compare the Sharpe Ratio of similar asset classes or strategies.

A negative Sharpe Ratio means the portfolio return is lower than the risk-free rate, indicating that you are taking on risk for a return worse than a risk-free asset like a government bond. In this case, holding a risk-free asset would have been a better choice.

The risk-free rate is the theoretical return of an investment with zero risk, typically represented by short-term government treasury bills or bonds. For US investors, the 3-month or 10-year US Treasury yield is commonly used. The current yield varies, but historical values often range between 2% and 5%.

Standard deviation (σ) measures the volatility or dispersion of an investment's returns. A higher standard deviation means the returns fluctuate more widely, indicating greater risk. Most brokerage platforms and financial data providers will display this figure for any given fund or portfolio.

The Sharpe Ratio is closely tied to the Capital Asset Pricing Model (CAPM), which defines the expected return of an asset based on its systematic risk. Both frameworks use the concept of a risk premium — the extra return demanded for taking on risk above the risk-free rate — to evaluate investment performance.

You can compare Sharpe Ratios across investments, but it's most meaningful when comparing similar asset classes or strategies over the same time period. Comparing a bond portfolio to a tech stock portfolio using Sharpe Ratio alone may be misleading due to structural differences in volatility and return profiles.