Sharpe Ratio Calculator
Measure risk-adjusted portfolio performance — calculate the Sharpe Ratio from return, risk-free rate, and volatility with automatic annualisation.
Input Parameters
All inputs below should be in the same period
Typically the T-Bill or government bond yield for the same period
Volatility of portfolio returns over the selected period
Results
Sharpe Ratio
0.6000
Interpretation
Below Average — consider improving strategy or reducing risk
Breakdown
Annualised Sharpe Scale
Complete Guide to the Sharpe Ratio
What Is the Sharpe Ratio?
The Sharpe Ratio is the most widely used metric for evaluating risk-adjusted investment performance. Developed by Nobel laureate William F. Sharpe in 1966, it answers a simple question: how much return am I earning for each unit of risk I take on?
A portfolio with a 20% return sounds great — until you learn its standard deviation was 40%. Meanwhile, a 10% return with 8% volatility is far more efficient. The Sharpe Ratio makes these comparisons instant and objective. Pair it with our Stock Volatility Calculator to estimate σ from historical price moves.
Formula
Sharpe Ratio:
Sharpe = (Rp − Rf) / σp
Where: Rp = portfolio return, Rf = risk-free rate, σp = standard deviation of portfolio returns
Annualisation:
Annualised Sharpe = Sharpe(period) × √T
Where: T = periods per year (252 daily, 52 weekly, 12 monthly, 4 quarterly)
Benefits of Using the Sharpe Ratio
Compare Any Two Strategies
Normalises returns by risk, so you can fairly compare a bond fund to a leveraged equity strategy on the same scale.
Portfolio Optimisation
Maximising the Sharpe Ratio is equivalent to finding the tangency portfolio on the efficient frontier — the best risk/return trade-off.
Quick Sanity Check
An annualised Sharpe above 2 is rare in liquid markets. If a backtest shows Sharpe 5+, something is likely overfit or the data is biased.
Risk Budgeting
Combine with position sizing from the Trade Risk Calculator to allocate capital proportional to each strategy's Sharpe.
Tips for Accurate Sharpe Calculation
Match Periods: If you enter monthly returns, use the monthly risk-free rate (annual rate ÷ 12) and monthly standard deviation. Mixing periods gives a meaningless number.
Use Enough Data: At least 30 observations (e.g. 30 months) for a statistically meaningful Sharpe. Short windows amplify noise and produce unstable estimates.
Watch for Autocorrelation: Illiquid assets (private equity, real estate) often show smoothed returns that understate true volatility. This inflates Sharpe artificially. Use our Portfolio Rebalancing Calculator to model diversified allocations more accurately.
Common Mistakes
Ignoring Tail Risk
Strategies that sell options or carry insurance-like risk can show a high Sharpe for years, then suffer a catastrophic loss. Standard deviation doesn't capture this — check skewness and kurtosis too.
Survivorship Bias
If your data set only includes funds that are still alive, the average Sharpe is biased upward. Failed funds (which had low Sharpes) are excluded, making the remaining universe look better than reality.
Using Nominal vs Real Returns
Be consistent: if you use nominal portfolio returns, use a nominal risk-free rate. Mixing real returns with nominal Rf (or vice versa) distorts the excess return and the ratio. Use our Inflation Calculator to convert between nominal and real.
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OpenFrequently Asked Questions
What is the Sharpe Ratio?
The Sharpe Ratio measures risk-adjusted return — how much excess return you earn per unit of volatility. It equals (Portfolio Return − Risk-Free Rate) / Standard Deviation. A higher Sharpe means better compensation for the risk taken. It was developed by Nobel laureate William Sharpe in 1966.
How do I annualise the Sharpe Ratio from monthly or daily data?
Multiply the per-period Sharpe by the square root of the number of periods in a year. Monthly Sharpe × √12 ≈ ×3.46. Daily Sharpe × √252 ≈ ×15.87 (using 252 trading days). This assumes returns are independently distributed — serial correlation in returns can inflate the annualised figure.
What counts as a 'good' Sharpe Ratio?
On an annualised basis: below 0.5 is poor, 0.5–1.0 is below average, 1.0–2.0 is good, 2.0–3.0 is very good, and above 3.0 is excellent. Most diversified equity indices deliver an annualised Sharpe around 0.4–0.6 over long horizons. Hedge funds typically target 1.0+.
What should I use as the risk-free rate?
Use the yield on a government bond or T-Bill that matches your return period. For US-based analysis, the 3-month T-Bill rate is standard. For annual returns use the 1-year T-Bill. As of mid-2026, US short-term rates are around 4–5%. For other countries, use the equivalent sovereign short-term rate.
What are common mistakes when using the Sharpe Ratio?
Three big pitfalls: (1) mixing period lengths — e.g. using an annual risk-free rate with monthly return/volatility; (2) using too short a sample — a few months of data can produce misleadingly high Sharpes; (3) ignoring non-normal returns — strategies with tail risk (e.g. selling options) can show a high Sharpe until a blow-up event.
How does the Sharpe Ratio compare to the Sortino Ratio?
The Sharpe Ratio uses total standard deviation (both upside and downside volatility), while the Sortino Ratio uses only downside deviation. Sortino is better for strategies with asymmetric returns (e.g. trend-following) because upside volatility is desirable. Use our Trade Risk Calculator to pair risk sizing with ratio analysis.