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The Sharpe ratio is one of the most widely used measures of risk-adjusted return — it shows how much extra return an investment generated for each unit of total risk (volatility) taken on, making it possible to compare investments with very different risk levels on a level footing.
How it works
Enter the portfolio's return, the risk-free rate (like a Treasury bill yield), and the standard deviation of the portfolio's returns, and the calculator applies Sharpe Ratio = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation.
- Enter portfolio return (%).
- Enter risk-free rate (%).
- Enter standard deviation of returns (%).
- Click Calculate to see your results.
Examples
A moderate risk-adjusted return
A portfolio returning 12% with a 3% risk-free rate and 15% standard deviation has a Sharpe ratio of 0.6 — for each unit of volatility taken on, it generated 0.6 units of excess return.
Who should use it
- Comparing risk-adjusted performance across funds or portfolios.
- Investment analysis and portfolio evaluation.
Industry applications
- Investment analysis and portfolio management
- Fund performance evaluation
Advantages
- The most widely recognized and reported risk-adjusted return metric.
- Enables direct comparison between investments with different volatility levels.
Limitations
- Treats upside and downside volatility as equally "risky," which doesn't match how most investors actually think about risk.
Common mistakes to avoid
- Comparing Sharpe ratios calculated over different time periods or using inconsistent risk-free rate assumptions.
- Treating Sharpe ratio as the only risk-adjusted metric worth checking — Treynor, Sortino, and Information Ratio each capture a different aspect of risk-adjusted performance.
Best practices
- Compare Sharpe ratios calculated over the same time period and using a consistent risk-free rate.
- Look at Sharpe alongside Sortino (downside-only risk) and Treynor (systematic risk only) for a fuller risk-adjusted performance picture.
Tips
- Pair this with the Sortino Ratio Calculator — if Sortino is notably higher than Sharpe for the same investment, most of its volatility has been upside, not downside, risk.