Sharpe Ratio Calculator

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Risk premium

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Sharpe ratio

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Table of Contents

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What is Sharpe Ratio?

The Sharpe ratio compares an investment’s excess return with the variability of its returns. Excess return is the investment return minus a risk-free reference return; variability is represented by standard deviation. The result is unitless and is often described as excess return per unit of total volatility.

This calculator uses three summary inputs and does not derive them from a return series. It is useful for checking arithmetic, but its quality depends on the same observation period, return frequency, annualization method and currency being used throughout. Historical risk-adjusted performance does not guarantee future results.

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How to Use This Calculator

  1. Enter the asset or portfolio return as a percentage for a defined period.
  2. Enter a risk-free return for the same period, currency and compounding basis.
  3. Enter a strictly positive standard deviation expressed on the same percentage scale and time basis.
  4. Select Calculate. The page reports risk premium and the ratio, rounded to four decimal places.

For 10%, enter 10 in all percentage fields rather than 0.10. Using decimals for every input would produce the same ratio, but mixing formats would not.

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Formula Used

Risk premium = investment return − risk-free return
Sharpe ratio = risk premium ÷ standard deviation of return

A sample-based historical calculation normally uses the mean excess return and the standard deviation of returns across observations. When annualizing from monthly data under common simplifying assumptions, excess return is multiplied by 12, volatility by √12, and the ratio by √12.

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Variables Explained

Input or resultMeaning
Investment returnExpected or historical return for the chosen period.
Risk-free returnReference return matched by period and currency.
Risk premiumInvestment return minus the reference return, in percentage points.
Standard deviationPositive measure of return dispersion using the same periodic basis.
Sharpe ratioUnitless excess-return-to-volatility ratio.
Observation frequencyDaily, monthly or annual basis used to estimate return and volatility.
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Worked Example

An investment return of 11%, a risk-free return of 3% and standard deviation of 16% produce an 8-percentage-point risk premium. Divide 8 by 16 to get a Sharpe ratio of 0.5.

If all three percentage quantities are instead written as decimals, (0.11 − 0.03) ÷ 0.16 also equals 0.5. Mixing 11 with 0.03 and 0.16 would create a meaningless value.

The ratio says the chosen estimates provided 0.5 units of excess return per unit of measured volatility. It does not say there was a 50% return or a 50% probability of profit.

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Why Use This Calculator?

Within a consistent comparison, a higher ratio reflects more excess return for the measured volatility. A negative ratio means the investment return was below the chosen risk-free return. A ratio near zero means little excess return relative to volatility.

Standard deviation treats upside and downside variation alike and may not describe skewed returns, illiquid assets or rare losses well. Smoothed or infrequently valued prices can understate measured volatility. Short histories make both mean return and standard deviation uncertain.

Use the ratio with drawdowns, fees, liquidity, leverage, concentration and investment objective. Comparisons should share a period, return type and risk-free proxy. The page provides no investment recommendation and does not adjust for tax, trading costs or non-normal returns unless already reflected in the inputs.

The ratio can also change when the observation window changes. A calm recent period may produce a higher value than a longer history containing stress. Report the dates, frequency and whether returns include distributions. For a portfolio decision, correlations with other holdings can matter more than an investment’s stand-alone volatility.

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Common Mistakes

    • Mixing annual return with monthly standard deviation.
    • Entering one input as a decimal and others as percentages.
    • Using zero standard deviation, which makes division undefined.
    • Choosing a risk-free rate from another currency or maturity without explanation.
    • Interpreting 0.5 as a 50% investment return.
    • Comparing gross performance with net performance.
    • Assuming past mean and volatility will persist.
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Frequently Asked Questions

What does a Sharpe ratio of 0.5 mean?

It means the inputs produced 0.5 units of excess return per unit of measured return volatility, not a 50 percent return.

Can the ratio be negative?

Yes. It becomes negative when the investment return is below the entered risk-free reference return.

Why must standard deviation be positive?

It is the denominator. Zero makes the ratio undefined, and standard deviation is not negative.

Should I use monthly or annual inputs?

Either can work when return, risk-free return and volatility all use the same period and scale.

Does a higher ratio guarantee better future results?

No. It summarizes chosen historical or expected inputs, which may not persist and may omit important risks.

Does volatility measure only losses?

No. Standard deviation counts variation above and below the mean, so upside movement also contributes.

Can I compare ratios from different sources?

First confirm their return period, annualization, risk-free proxy, fee treatment and observation window are consistent.

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Sources & References

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