What is the Sharpe ratio?

Sharpe ratio measures risk-adjusted return — how much excess return you earn per unit of volatility. It's the gold standard for comparing investment performance accounting for risk. Higher Sharpe = better.

How is Sharpe ratio calculated?

Sharpe = (Portfolio Return − Risk-Free Rate) / Standard Deviation. All three values should be annualized. Risk-free rate is typically the 10-year Treasury yield. Standard deviation measures portfolio volatility.

What is a good Sharpe ratio?

1+ is good, 2+ is very good, 3+ is excellent (rare and usually unsustainable). Below 1 is subpar. Below 0 means the investment underperformed risk-free assets. The S&P 500 historically averages Sharpe of 0.4-0.6 over long periods.

Why is Sharpe ratio important?

It normalizes returns by risk, allowing fair comparison between investments with different volatility profiles. A 10% return with low volatility may be better than 20% with high volatility. Sharpe quantifies this trade-off.

What is excess return?

Excess return = Portfolio Return − Risk-Free Rate. It's the additional return you earn over what you could get from a risk-free investment (like Treasury bonds). The Sharpe ratio measures whether that excess return justifies the risk taken.

Sharpe vs Sortino vs Treynor?

Sharpe uses total volatility (standard deviation). Sortino uses only downside volatility (penalizes only losses). Treynor uses beta (systematic risk only). Sortino is preferred for asymmetric returns; Treynor for diversified portfolios; Sharpe for general use.

Can Sharpe ratio be negative?

Yes — negative Sharpe means the portfolio earned LESS than the risk-free rate. You'd have been better off in Treasury bonds. Negative Sharpe with high volatility is the worst combination — you took risk and were not compensated.

What's a good benchmark for risk-free rate?

Use the 10-year US Treasury yield (currently ~4%). Some practitioners use 3-month T-bills for short-term portfolios. The choice should match your investment horizon. Treasury yields are considered risk-free because the US government can always print dollars to pay them.

Sharpe Ratio Calculator

The Sharpe Ratio measures how much excess return you receive for the extra volatility you endure for holding a riskier asset. Created by Nobel laureate William Sharpe, it's the most widely used risk-adjusted return metric. Formula: (Portfolio Return − Risk-Free Rate) / Standard Deviation. Higher Sharpe = better risk-adjusted return. A Sharpe of 1+ is good, 2+ is very good, 3+ is excellent. Negative Sharpe means the investment underperformed risk-free assets.

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calendar_today Updated: April 2026

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assessmentPortfolio Stats

Portfolio Return %

Risk-Free Rate %

10-year Treasury yield (~4%)

Standard Deviation %

Annualized portfolio volatility

trending_upRisk-Adjusted Return

Sharpe Ratio

0.53

Below Average

Subpar risk-adjusted return

Excess Return (Portfolio − RFR)

8.00%

Sharpe scale: <1 subpar · 1-2 good · 2-3 very good · 3+ excellent

tips_and_updates Tips

• Sharpe > 1: good risk-adjusted return
• Sharpe > 2: very good (sustained high Sharpe is rare)
• Sharpe > 3: excellent (usually short-term anomaly)
• Sharpe < 1: subpar risk-adjusted return
• Negative Sharpe: investment underperformed risk-free rate
• Use 10-year Treasury yield as risk-free rate (currently ~4%)
• Compare Sharpe to peers/benchmark, not in isolation
• Sharpe doesn't capture skewness — use Sortino for downside risk

functions Formula

{Sharpe Ratio = (Portfolio Return − Risk-Free Rate) / Standard Deviation [{Portfolio Return Annual return of the investment/portfolio} {Risk-Free Rate Return on risk-free asset (10-year Treasury yield)} {Excess Return Portfolio Return − Risk-Free Rate} {Standard Deviation Annualized volatility of the portfolio}] Sharpe ratio normalizes returns by risk taken. A 12% return with 5% volatility (Sharpe 1.6) is better than 15% with 20% volatility (Sharpe 0.55). It lets you compare investments with different risk profiles on equal footing. Higher Sharpe = more reward per unit of risk.}

science Example: Portfolio 12%, RFR 4%, StdDev 15%

Excess return = 12% − 4% = 8%. Sharpe = 8% / 15% = 0.53. This means for every 1% of volatility, you earn 0.53% above the risk-free rate. Below 1.0 is considered subpar — you're not getting enough return for the risk taken. The S&P 500 historically has Sharpe around 0.4-0.6.

Expected Results

Sharpe Ratio 0.5

Excess Return 8%

Interpretation Subpar risk-adjusted return

Quality Rating Below Average

How to Use This Calculator

Enter portfolio return

Annualized return %.

Enter risk-free rate

Use 10-year Treasury yield.

Enter standard deviation

Annualized volatility.

Review Sharpe + interpretation

Higher Sharpe = better risk-adjusted return.

The Formula

Sharpe ratio normalizes returns by risk taken. A 12% return with 5% volatility (Sharpe 1.6) is better than 15% with 20% volatility (Sharpe 0.55). It lets you compare investments with different risk profiles on equal footing. Higher Sharpe = more reward per unit of risk.

Sharpe Ratio = (Portfolio Return − Risk-Free Rate) / Standard Deviation

lightbulb Variables Explained

Portfolio Return Annual return of the investment/portfolio
Risk-Free Rate Return on risk-free asset (10-year Treasury yield)
Excess Return Portfolio Return − Risk-Free Rate
Standard Deviation Annualized volatility of the portfolio

tips_and_updates Pro Tips

Sharpe > 1: good risk-adjusted return

Sharpe > 2: very good (sustained high Sharpe is rare)

Sharpe > 3: excellent (usually short-term anomaly)

Sharpe < 1: subpar risk-adjusted return

Negative Sharpe: investment underperformed risk-free rate

Use 10-year Treasury yield as risk-free rate (currently ~4%)

Compare Sharpe to peers/benchmark, not in isolation

Sharpe doesn't capture skewness — use Sortino for downside risk

Frequently Asked Questions

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