Sharpe Ratio Calculator Guide
Use this Sharpe Ratio calculator to measure risk-adjusted return by comparing portfolio return, risk-free rate, and volatility.
How to use the Sharpe Ratio calculator
Enter the investment return, risk-free rate, and standard deviation. The calculator estimates Sharpe Ratio, excess return, Sortino Ratio, Treynor Ratio, benchmark comparisons, and sensitivity scenarios.
Use the time horizon setting to annualize daily or monthly return and volatility assumptions before comparing investments.
Sharpe Ratio formula
The Sharpe Ratio formula is: Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation. It shows how much excess return an investment earned for each unit of volatility.
A higher Sharpe Ratio generally means better risk-adjusted performance, assuming the investments being compared use consistent return periods and volatility measures.
How to interpret Sharpe Ratio
A Sharpe Ratio below 0 means the investment underperformed the risk-free rate. A ratio around 1.0 is often considered good, above 2.0 is strong, and above 3.0 is exceptional, though standards vary by asset class.
Sharpe Ratio is most useful when comparing investments with different volatility. A higher return is not always better if it requires much higher risk.
Sharpe Ratio vs Sortino Ratio
Sharpe Ratio uses total volatility, including both upside and downside movement. Sortino Ratio focuses more on downside volatility, which can be useful when upside volatility is not considered harmful.
Use both metrics together when comparing funds, strategies, or portfolios. Sharpe Ratio is simple and widely used, while Sortino can add context about downside risk.
Common Sharpe Ratio mistakes
The most common mistake is comparing Sharpe Ratios built from different time periods or inconsistent annualization. Daily, monthly, and annual inputs must be handled consistently.
Sharpe Ratio can also be misleading when returns are skewed, illiquid, smoothed, or exposed to rare large losses. It should not be the only risk metric used.
- Use consistent return and volatility periods.
- Check whether returns are annualized before comparing results.
- Compare investments within similar asset classes when possible.
- Review drawdowns and downside risk alongside Sharpe Ratio.