Sharpe Ratio Calculator
Calculate the Sharpe ratio from portfolio return, the risk-free rate and standard deviation, with a plain-language reading.
How it works
Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation
The Sharpe ratio measures return per unit of risk. It subtracts the risk-free rate (what you could earn with no risk, roughly a Treasury yield) from the portfolio return to get the excess return, then divides by the standard deviation of returns — a measure of volatility. A higher ratio means you are being paid more for each unit of bumpiness, which is the whole point of taking risk.
Worked example
A portfolio returning 12% with a 2% risk-free rate and a 8% standard deviation has a Sharpe ratio of (12 − 2) ÷ 8 = 1.25 — a good risk-adjusted return, since it clears the 1.0 threshold.
Frequently asked questions
What is a good Sharpe ratio?
As a rough guide: under 1 is sub-par, 1–2 is good, 2–3 is very good, and above 3 is excellent. Context matters — long-only stock portfolios often sit below 1, so compare against similar strategies.
What counts as the risk-free rate?
Usually the yield on a short-term government security like a 3-month Treasury bill, since it is considered essentially risk-free over that horizon.
What are the Sharpe ratio’s limits?
It treats all volatility as bad, including big upside moves, and assumes returns are roughly normally distributed. The Sortino ratio, which counts only downside volatility, addresses part of that criticism.
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Educational estimate, not investment or tax advice. Returns are never guaranteed and past performance does not predict the future. Confirm with a licensed advisor.