Sharpe Ratio Calculator
Risk adjusted return: Sharpe ratio from gain, cash rate, and volatility.
What it does
Raw returns lie by omission: 18 percent with wild swings can serve worse than 12 percent gliding smooth. The Sharpe ratio fixes the comparison by dividing excess return over cash by volatility. One number then prices reward per unit of bumpiness.
The tool above computes (Rp - Rf) / SD the moment you type. Enter portfolio return, risk free rate, and volatility. It returns the ratio, the excess, and a rough grade. Defaults of 12, 3, and 15 print 0.6, Modest, so the page opens solved.
The grade bands are convention, not law. Below zero means cash beat the fund after risk. Zero to one is modest, one to two is good, and above two is excellent, though short samples and lucky years inflate readings. Judge managers over full cycles with the same annualization.
Volatility choice shapes everything. Total standard deviation punishes upside jumps as well as crashes, which flatters steady grinders and insults lottery like payoffs. Downside only versions such as Sortino exist for that complaint; this page keeps the classic form Sharpe defined.
Use the table to see how return and calm trade off, then run the fund. A Sharpe of 1.5 at 15 excess over 10 volatility beats a 0.6 built on 9 over 15, even though the second fund earned nearly as much.
How to use
- Enter the portfolio return for the period.
- Enter the matching risk free rate.
- Enter volatility as standard deviation.
- Read the Sharpe ratio first, then excess.
- Check the rough grade band.
- Compare with peers over the same span.
Formula
- Rp
- Portfolio or fund return in percent.
- Rf
- Risk free rate in percent, often T bill yield.
- SD
- Standard deviation of returns in percent.
Rp is the portfolio return, Rf the risk free rate, SD the standard deviation of returns. Excess return sits upstairs, total volatility downstairs. The page uses the classic excess over cash form; benchmark relative versions divide by tracking error instead.
Worked example
Example: 12% return, 15% volatility, 3% safe rate
A portfolio returns 12% with 15% volatility while T bills pay 3%. Find the Sharpe ratio.
- Excess return: 12 - 3 = 9%.
- Divide by volatility: 9 / 15 = 0.6.
- The tool prints Sharpe 0.6, excess 9%, grade Modest.
- Below 1 the portfolio pays modestly per risk unit.
- To reach 1.0 at the same volatility it would need 18% return.
- Compare against the benchmark Sharpe before judging.
Reference table
| Return | Volatility | Sharpe | Reads as |
|---|---|---|---|
| 12% | 15% | 0.6 | Modest (worked case) |
| 18% | 10% | 1.5 | Good |
| 2% | 10% | -0.2 | Negative |
| 18% | 15% | 1 | Boundary of good |
Limits
- Volatility stands in for risk; skew breaks that proxy.
- Short samples inflate readings.
- Needs matching periods for return, cash, and SD.
- Grade bands are rough convention.
Common mistakes
- Mixing monthly returns with annual volatility.
- Ignoring that upside jumps also lower Sharpe.
- Comparing Sharpes across different eras.
- Chasing a high Sharpe from one lucky year.
- Forgetting fees that shrink excess first.
Try it yourself
Quick checks. Answers sit tucked under each question.
Return 18%, cash 3%, volatility 10%?
Excess 18 - 3 = 15%. Ratio 15 / 10 = 1.5, grade Good.
Return 2%, cash 4%, volatility 10%?
Excess 2 - 4 = -2%. Ratio -2 / 10 = -0.2, grade Negative.
What return hits 1.0 at 15% volatility with cash 3%?
Need excess 15 for 1.0, so return must be 3 + 15 = 18%.
Questions
What does 1.5 actually mean?
Excess return per unit of total volatility. A Sharpe of 1.5 pays 1.5 points of excess per point of standard deviation.
Monthly or annual inputs?
Annualize first: multiply a monthly Sharpe by root 12. Never compare a monthly Sharpe with an annual one directly.
Sharpe versus Sortino?
Sortino divides by downside deviation only, so it forgives upside jumps. Sharpe penalizes both directions of swing.
Can a calmer fund beat a hotter one?
Yes. A lower return fund with calmer risk can outrank a hot fund. That is the point: risk adjusted, not raw.
What counts as a good Sharpe?
Roughly: negative is poor, 0 to 1 modest, 1 to 2 good, above 2 excellent. Context and sample length still decide.
When does Sharpe mislead?
It assumes volatility captures risk and returns look bell shaped. Skewed strategies like option selling flatter it.