Sharpe Ratio
Excess return per unit of total volatility. Computes the mean of the return series, subtracts the risk-free rate, and divides by the sample standard deviation of returns.
When to use: The default risk-adjusted-return metric. Use to compare portfolios, funds, or strategies on a single number that combines return and risk. Higher is better; >1 is generally good, >2 is excellent (using monthly data).
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| Sharpe | Sharpe Ratio | Excess return per unit of total volatility | integer |
| Returns | Periodic Returns | Sequence of periodic returns as decimals (e.g. 0.05 for 5%) | % |
| Rf | Risk-Free Rate | Per-period risk-free rate as a decimal (use the same period as the returns) | % |
Real-Life Examples
Example 1: Five-Period Portfolio
Periodic returns of 10%, 15%, 5%, 20%, 8%. Per-period risk-free rate is 3%.
Given
Step-by-Step
Sharpe of 1.45 — strong risk-adjusted performance. Each unit of total volatility has earned 1.45× the excess return.
Frequently Asked Questions
Depends on the period of returns. Using monthly data: above 1 is decent, above 2 is excellent, above 3 is exceptional. Using annual returns the bar is roughly the same numerically. Be skeptical of self-reported Sharpe ratios from short backtests — they're trivially gameable.
Yes when comparing across portfolios with different sampling frequencies. Annualized Sharpe = Sharpe × √(periods per year). Monthly Sharpe of 0.5 → annualized ≈ 0.5 × √12 ≈ 1.73.
When return distributions are highly skewed or fat-tailed — Sharpe assumes return symmetry. Strategies that sell tail risk (e.g. short volatility) can show high Sharpe in calm regimes but blow up in tails. Use Sortino or max-drawdown alongside.
This calculator uses the sample standard deviation (divisor n-1), which is the convention in nearly all finance textbooks and Bloomberg. Population (divisor n) is rarely used in practice.