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Audit the return. Calculate the Sharpe Ratio to measure the risk-adjusted performance of an investment portfolio.
Step-by-step breakdown of the underlying equations.
A Sharpe Ratio of 0.80 indicates you are earning 0.80 units of excess return for every unit of risk taken. Generally, a ratio above 1.0 is considered good, while ratios above 3.0 are exceptional (often seen in high-frequency trading or market-neutral strategies).
The Sharpe Ratio Calculator measures risk-adjusted investment performance, answering the critical question: "How much excess return am I getting for each unit of risk I'm taking?"
Named after Nobel laureate William F. Sharpe, this ratio is the industry standard for comparing investment strategies. A higher Sharpe Ratio indicates better risk-adjusted returns—you're being compensated more for the volatility you're accepting.
Scenario: Comparing two portfolios—both returned 12% annually, but with different volatility.
Caution: Sharpe Ratio assumes normal distribution of returns. It may understate risk for strategies with rare but extreme losses.
Generally: Below 1.0 = sub-optimal risk-adjusted returns, 1.0-2.0 = good, 2.0-3.0 = very good, Above 3.0 = excellent (rare for long-term strategies). The S&P 500 historically has a Sharpe Ratio around 0.4-0.5, so beating 1.0 consistently is considered skilled management.
The risk-free rate is the return you could earn with zero risk—typically the yield on short-term government bonds (US Treasury bills). As of 2024-2026, this is roughly 4-5%. Use the current 3-month T-bill rate for accurate calculations.
The Sharpe Ratio penalizes all volatility equally. The Sortino Ratio only penalizes downside volatility (losses), arguing that upside volatility is actually good for investors. For asymmetric return distributions, Sortino may be more appropriate.
Yes. A negative Sharpe Ratio means your returns are lower than the risk-free rate—you would have been better off in Treasury bills. This indicates the portfolio is destroying value on a risk-adjusted basis.
Standard deviation measures how much returns vary from the average. Calculate it using historical monthly or annual returns: find the average return, subtract each return from the average, square those differences, find the mean of the squares, then take the square root. Most brokers and finance tools provide this automatically.