Sharpe Ratio Calculator
Calculate the Sharpe ratio of an investment from its return, the risk-free rate, and its standard deviation to measure risk-adjusted performance.
How to use this tool
- Enter the portfolio or investment return for the period.
- Enter the risk-free rate over the same period.
- Enter the standard deviation (volatility) of the returns.
- Read the Sharpe ratio and the excess return over the risk-free rate.
- Compare ratios across investments — higher is better risk-adjusted.
The Sharpe ratio shows how much return you earn for the risk you take. Enter the portfolio return, the risk-free rate, and the standard deviation to measure risk-adjusted performance.
Formula
Excess return = Portfolio return − Risk-free rate.
Sharpe ratio = Excess return ÷ Standard deviation of returns. It measures how much return you earn per unit of total risk (volatility).
A higher Sharpe ratio means better risk-adjusted performance. The return, risk-free rate, and standard deviation should all be measured over the same period (usually annual).
How it works
The Sharpe ratio, developed by Nobel laureate William F. Sharpe, measures how much excess return an investment delivers for each unit of risk it takes. It subtracts the risk-free rate from the portfolio's return to isolate the reward for taking risk, then divides by the standard deviation of returns, the standard proxy for total volatility.
Because it normalizes return by risk, the Sharpe ratio lets you compare investments with very different volatilities on a level footing. As a rough guide, a ratio below 1 is often considered sub-par, around 1 acceptable, 2 very good, and 3 or above excellent — though these thresholds depend on asset class and period. All three inputs should cover the same horizon; mixing a monthly return with an annual standard deviation gives a meaningless result.
The ratio has limits: it penalizes upside and downside volatility equally and assumes returns are roughly normally distributed, so it understates the risk of strategies with fat-tailed or skewed returns. The Sortino ratio, which counts only downside deviation, is a common complement. Reviewed by the AbraCalc Investing Desk. This tool provides general information, not investment advice; verify figures and consult a licensed professional before investing.
Worked example
12% return, 2% risk-free rate, 15% standard deviation
- Excess return = 12% − 2% = 10.00%.
- Sharpe ratio = 10 ÷ 15 = 0.6667.
Sharpe ratio: 0.6667 — excess return 10.00% over the risk-free rate.
Sharpe ratio by excess return and volatility
| Excess return | Standard deviation | Sharpe ratio |
|---|---|---|
| 5% | 10% | 0.50 |
| 5% | 15% | 0.33 |
| 8% | 12% | 0.67 |
| 10% | 10% | 1.00 |
| 10% | 20% | 0.50 |
Key terms
- Sharpe ratio
- Excess return per unit of total risk: (return − risk-free rate) ÷ standard deviation.
- Risk-free rate
- The return on an essentially risk-free asset, such as short-term government Treasury bills.
- Standard deviation
- A measure of how much returns vary around their average; a proxy for volatility or risk.
- Excess return
- The return above the risk-free rate — the reward for taking on risk.
- Sortino ratio
- A variant of the Sharpe ratio that divides excess return by downside deviation only.
Frequently asked questions
- What is the Sharpe ratio?
- It is a measure of risk-adjusted return: the excess return over the risk-free rate divided by the standard deviation of returns. Higher values indicate more return per unit of risk.
- What is a good Sharpe ratio?
- As a rough guide, below 1 is sub-par, around 1 is acceptable, 2 is very good, and 3 or higher is excellent. Reasonable values vary by asset class and time period.
- Why subtract the risk-free rate?
- Subtracting the risk-free rate isolates the return earned specifically for taking risk, so you are not rewarding an investment for returns you could have earned risk-free.
- What are the Sharpe ratio's limitations?
- It treats upside and downside volatility the same and assumes roughly normal returns, so it can understate risk for skewed or fat-tailed strategies. The Sortino ratio addresses downside risk specifically.