Sharpe Ratio Calculator
Last updated: 27 June 2026
Reviewed by Gavin Meiring, Lead research and primary author · Doctoral Candidate (Corporate Governance) · Research and drafting assisted by AI
- The Sharpe ratio was created by William F. Sharpe, who published it in 1966 under the name 'reward-to-variability ratio' — and he shared the 1990 Nobel Prize in Economics with Harry Markowitz and Merton Miller.
- The ratio divides an investment's excess return (above the risk-free rate) by its volatility — answering the question: how much return did I get for each unit of risk I took?
- Sharpe himself later warned the ratio can be gamed: a fund that lowers its risk just before the measurement period ends can flatter its Sharpe number, so it's worth comparing funds over long, consistent periods.
Sharpe Ratio Calculator
The Sharpe ratio calculator measures how much excess return an investment generates per unit of risk taken. It is used by portfolio managers, analysts, and individual investors to compare investments on a risk-adjusted basis. A higher Sharpe ratio indicates better risk-adjusted performance.
How to Use the Sharpe Ratio Calculator
- Enter the portfolio's average annual return as a percentage.
- Enter the risk-free rate, typically the yield on government bonds or treasury bills.
- Input the portfolio's standard deviation of returns (a measure of volatility).
- The calculator divides the excess return by the standard deviation and displays the Sharpe ratio.
- Compare the result against other portfolios or benchmarks to assess relative performance.
The Formula
Sharpe Ratio = (Portfolio Return minus Risk-Free Rate) divided by Standard Deviation of Portfolio Returns
Each component is defined as follows.
Portfolio Return is the average annual return of the investment over the measurement period, expressed as a percentage.
Risk-Free Rate is the return available from a risk-free investment such as UK gilts or US Treasury bills. It represents the minimum return an investor should expect for taking on any risk at all.
Standard Deviation measures the variability of returns. A higher standard deviation means returns are more unpredictable and volatile.
The resulting ratio tells you how many units of return you earn for each unit of risk. A ratio above 1.0 is generally considered acceptable. Above 2.0 is good, and above 3.0 is excellent.
Real-World Example
Portfolio A returned 12% per year with a standard deviation of 10%. The risk-free rate is 4%.
Sharpe Ratio = (12 minus 4) divided by 10 = 8 divided by 10 = 0.8.
Portfolio B returned 10% per year with a standard deviation of 5%. Risk-free rate is still 4%.
Sharpe Ratio = (10 minus 4) divided by 5 = 6 divided by 5 = 1.2.
Portfolio A produced a higher raw return, but Portfolio B has a better Sharpe ratio (1.2 versus 0.8). This means Portfolio B generated more return per unit of risk. An investor who cannot or does not want to use gearing would be better served by Portfolio B on a risk-adjusted basis.
Comparing five portfolios on one table
Extend the same calculation across a wider set of candidates and the ranking by Sharpe ratio stops matching the ranking by return. The risk-free rate is 4% in every row.
| Portfolio | Annual return | Standard deviation | Excess return | Sharpe ratio | Rank by Sharpe | Rank by return |
|---|---|---|---|---|---|---|
| A | 12% | 10% | 8% | 0.800 | 2 | 2 |
| B | 10% | 5% | 6% | 1.200 | 1 | 3 |
| C | 15% | 18% | 11% | 0.611 | 4 | 1 |
| D | 6% | 3% | 2% | 0.667 | 3 | 4 |
| E | 3% | 8% | -1% | -0.125 | 5 | 5 |
Portfolio C delivered the highest return of the five and finished fourth on risk adjustment, because it needed an 18% standard deviation to get there. Portfolio B delivered three percentage points less return and won, because it needed only a 5% standard deviation. Portfolio D produced the smallest positive excess return in the set and still beat Portfolio C on this measure.
Portfolio E shows what a negative ratio means. It returned 3% against a 4% risk-free rate, so it lost ground against simply holding the risk-free asset, and it took an 8% standard deviation of risk to do it. A negative Sharpe ratio is not a close call to be argued either way.
The risk-free rate moves the answer
The risk-free rate is an input, not a constant, and a small change in it moves every ratio in the comparison. Hold Portfolio A at a 12% return and a 10% standard deviation, then vary the risk-free rate.
| Risk-free rate | Excess return | Sharpe ratio |
|---|---|---|
| 2% | 10% | 1.000 |
| 4% | 8% | 0.800 |
| 6% | 6% | 0.600 |
Two percentage points on the risk-free rate moves the ratio from 1.000 to 0.800, which crosses the line from a result most investors would accept to one they would question. When you compare two portfolios, run both against the same risk-free rate and the same measurement period, or you are comparing two different calculations.
Annualising a Sharpe ratio from monthly figures
Returns are often reported monthly, and the annualised ratio is not twelve times the monthly ratio. It is the square root of twelve times the monthly ratio, and the reason is worth walking through because the shortcut is easy to misremember.
Take a portfolio with a monthly excess return of 0.6% and a monthly standard deviation of 3.0%.
The monthly ratio is 0.6 / 3.0 = 0.200.
To annualise, scale the two components separately. The annual excess return is 12 x 0.6% = 7.2%. The annual standard deviation is 3.0% x the square root of 12, and the square root of 12 is 3.4641, so the annual standard deviation is 3.0 x 3.4641 = 10.3923%.
The annualised ratio is then 7.2 / 10.3923 = 0.6928.
Check it against the shortcut: the square root of 12 is 3.4641, and 3.4641 x 0.200 = 0.6928. The two routes agree, which they must, because the return scales with time and the standard deviation scales with the square root of time.
Multiplying the monthly ratio by 12 instead gives 2.400, which overstates the annualised figure by a factor of 3.4641. That mistake shows up often enough in fund marketing material to be worth checking for.
Method and assumptions
The calculation is simple, and the assumptions underneath it are what decide whether the number means anything.
The standard deviation in the denominator is the standard deviation of returns over the same period as the return in the numerator. One row measured monthly and one row measured annually cannot be mixed without annualising one of them first.
The ratio treats volatility as risk, and it treats an upward price move and a downward price move of the same size as the same amount of risk. A strategy that produces occasional large gains is penalised for them. The Sortino ratio answers that by using only downside deviation in the denominator.
The whole framework assumes returns over the period are independent and come from a distribution close enough to normal that the standard deviation describes it. Hedge fund and option strategies routinely break that assumption, and their reported ratios can look better than the risk they carry. Smoothing reported marks on an illiquid holding lowers measured volatility without lowering real risk, and the measured ratio rises as a result.
Nothing in the formula accounts for fees, taxes, dealing costs or the length of the track record. A ratio calculated over three good years and a ratio calculated over fifteen years sit in the same column and mean different things.
Read the ratio as one measurement among several. It ranks candidates well when the candidates hold similar assets over similar periods. It ranks them badly when the assets differ in liquidity, in the distribution of their returns, or in how long they have been running.
Interpreting and Comparing Sharpe Ratios
The Sharpe ratio is most useful as a comparative tool rather than an absolute measure. When evaluating funds in the same category (for example, global equity funds), a higher Sharpe ratio indicates the manager is delivering better returns per unit of volatility.
A negative Sharpe ratio means the portfolio underperformed the risk-free rate after adjusting for volatility. This is a clear warning signal, suggesting the portfolio took on significant risk for below-risk-free returns.
The ratio has limitations. It uses standard deviation as the sole measure of risk, which treats upside and downside volatility equally. Investors generally welcome upside volatility, so this can penalise funds that have occasional large positive returns. The Sortino ratio addresses this by using only downside deviation in the denominator.
The Sharpe ratio also assumes normally distributed returns, which is often not the case in practice. Strategies that use options or hedge funds with return distributions that have fat tails can have artificially inflated Sharpe ratios.
Frequently Asked Questions
What is a good Sharpe ratio for a stock portfolio? A Sharpe ratio above 1.0 is broadly considered acceptable, above 2.0 is good, and above 3.0 is excellent. Most diversified equity funds over long periods produce Sharpe ratios between 0.5 and 1.5. Anything below zero indicates underperformance relative to the risk-free rate on a risk-adjusted basis.
What risk-free rate should I use? Use the current yield on short-term government securities in your home currency. For UK investors, the 3-month gilt rate is common. For US investors, the 3-month Treasury bill rate is standard. The rate should match the period over which you are calculating the portfolio's return.
How does the Sharpe ratio differ from the Treynor ratio? The Sharpe ratio uses total volatility (standard deviation) as the risk measure. The Treynor ratio uses beta, which measures only market-related (systematic) risk. The Treynor ratio is more appropriate for evaluating a portfolio that is one component of a larger diversified portfolio, where unsystematic risk has been diversified away.
Can the Sharpe ratio be gamed or manipulated? Yes. A manager can artificially inflate the Sharpe ratio by smoothing reported returns (common in illiquid asset funds), by selecting a short favourable measurement period, or by using strategies that appear low-volatility but carry hidden tail risks. Always examine the full return history and underlying strategy before relying solely on the Sharpe ratio.
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Where the measure comes from
The ratio was introduced by William F. Sharpe in "Mutual Fund Performance", published in The Journal of Business, volume 39, number 1, part 2, January 1966, pages 119 to 138. Sharpe called it the reward-to-variability ratio at that point, and the name did not stick. He revisited it in "The Sharpe Ratio", The Journal of Portfolio Management, volume 21, number 1, Fall 1994, pages 49 to 58, where he set out the annualisation and the assumptions discussed above. The 1994 paper is available from his Stanford page at http://web.stanford.edu/~wfsharpe/art/sr/sr.htm.