Sharpe Ratio Calculator

What the Sharpe ratio calculator does

The Sharpe ratio calculator measures the risk-adjusted return of a portfolio or investment: how much return you earned for each unit of risk you accepted. It subtracts the risk-free rate from your return and divides by the volatility of that return, giving one number you can use to compare very different investments.

A portfolio that gained 20 percent might look far better than one that gained 10 percent, but if the first swung wildly to get there while the second climbed steadily, the higher return carried much more risk. The Sharpe ratio shows which investment used risk more efficiently.

How the Sharpe ratio works

The ratio, developed by Nobel laureate William F. Sharpe, starts from the fact that any investor can earn the risk-free rate without meaningful risk, so only the return above that baseline rewards uncertainty. That surplus is the excess return.

The excess return is divided by the standard deviation of returns, which captures how much returns move around their average from period to period. For the same excess return, a smoother portfolio scores higher than a jumpy one, so the ratio rewards consistency as well as gains.

Sharpe ratio = (Portfolio return − Risk-free rate) ÷ Standard deviation

A ratio of 0.6 means you earned 0.6 units of excess return for every unit of volatility you were exposed to.

The three inputs

• Portfolio return is the annual return your investment achieved. It can be a realised historical figure or an expected one, but be consistent about which you use.
• The risk-free rate is the return on a safe benchmark, usually a short-term government bond, and sets the bar the portfolio must clear.
• Standard deviation is the volatility of the portfolio's returns as a percentage. A wider standard deviation means larger swings and more risk.

All three are percentages, so the excess return is a percentage and the Sharpe ratio is a plain number with no units.

How to use the calculator

1. Enter the portfolio's annual return.
2. Enter the risk-free rate for the same period.
3. Enter the standard deviation of the portfolio's returns.

The tool shows the excess return and the Sharpe ratio. Calculate the ratio for two or more portfolios; the one with the higher number delivered more return for its risk, even if its headline return was lower.

Raise the standard deviation while holding the return steady and the ratio falls. Lower the risk-free rate and the excess return widens, lifting the ratio, which is why the same portfolio can look better or worse depending on interest rates.

Reading the result

As a broad convention, a ratio below 1 is often considered modest, around 1 respectable, above 2 very good, and above 3 excellent. Treat these bands loosely, because the right benchmark depends on the asset class and the period measured.

The Sharpe ratio treats all volatility as bad, penalising sharp upward moves as much as downward ones, although most investors fear only the downside. It assumes roughly normally distributed returns, which can understate the risk of investments prone to rare but severe losses. And it depends on the period chosen: a fund can look brilliant over one stretch and mediocre over another.

Why risk-adjusted return matters

Two managers can post the same return, but if one did so with half the volatility, that manager was more skilful, or luckier, in a way raw return figures hide.

For a long-term investor, a smoother path is easier to stay invested through, less likely to trigger panic selling at the bottom, and more predictable for planning. Chasing the highest headline return often means accepting volatility few people can tolerate when markets fall.

Using the ratio

Compare funds within the same category, check the ratio over several time periods, and pair it with the Sortino ratio, which looks only at downside risk, or the Treynor ratio, which uses market risk instead of total volatility.

This article is general information only and is not financial advice.

About This Sharpe Ratio Calculator

Use this Sharpe ratio calculator to get an instant estimate based on the figures you enter. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.