Sharpe Ratio Calculator — Risk-Adjusted Return
Measure how much return your portfolio earns per unit of risk: enter the annualised portfolio return, the risk-free rate, and the standard deviation of returns.
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Risk-adjusted excess return per unit of volatility — higher is better
- 1
Excess return (Rp − Rf)
12 % − 4.5 % = 7.5 % - 2
Sharpe Ratio
7.5 ÷ 15 = 0.5000Excess return divided by volatility — how much extra return you earn per unit of risk.
How does this calculator work?
The Sharpe ratio = (Rp − Rf) / σp measures how much excess return above the risk-free rate you earn per unit of portfolio volatility. Enter annualised portfolio return, risk-free rate, and standard deviation. A ratio above 1.0 is generally considered good; above 2.0 is very good.
Formula
How this is calculated
The Sharpe ratio, developed by Nobel laureate William F. Sharpe (1966), answers a simple question: for every extra percentage point of volatility you accept, how much extra return do you earn above the risk-free alternative? A ratio of 1.0 means you earn one unit of excess return per unit of risk; above 1 is generally considered good; above 2 is excellent; a negative ratio means the portfolio underperformed the risk-free rate.
The formula divides excess return (Rp − Rf) by the standard deviation σp of portfolio returns. All three inputs must use the same time horizon — typically annualised figures derived from monthly or daily return series. The risk-free rate is commonly approximated by the 3-month Treasury bill yield or a short-term government bond in the portfolio's currency (as of mid-2025, approximately 4–5% in the US).
Key limitations: the Sharpe ratio penalises upside and downside volatility equally, which can mislead for strategies with positively skewed return distributions. It uses historical data, and past volatility and returns are no guarantee of future performance. For asymmetric strategies (options, hedge funds), the Sortino ratio — which divides only by downside deviation — is often a better complement. The ratio is also sensitive to the choice of time period and benchmark risk-free rate.
Frequently asked questions
As a general rule of thumb: below 1.0 is acceptable for most investors; 1.0–2.0 is good; 2.0–3.0 is very good; above 3.0 is exceptional and rare over long periods. Broad passive index funds typically produce Sharpe ratios of 0.5–1.5 over multi-decade horizons. Negative values mean you earned less than the risk-free rate.
Use the yield on a short-term government instrument in the same currency as your portfolio returns — commonly the 3-month T-bill (USD), Gilt (GBP) or Bund (EUR). For historical comparisons, use the rate that prevailed during the measurement period, not today's rate, to avoid mixing time periods.
The Sharpe ratio divides excess return by total standard deviation, penalising both upward and downward volatility equally. The Sortino ratio divides by downside deviation only, rewarding strategies that have high upside swings but low downside risk. For symmetric return distributions the two are proportional; they diverge for skewed strategies.
TG we-Calculate Editorial Team. (2026). Sharpe Ratio Calculator — Risk-Adjusted Return [Online calculator]. TG we-Calculate. https://we-calculate.com/calculator/sharpe-ratio-calculator
TG we-Calculate Editorial Team. "Sharpe Ratio Calculator — Risk-Adjusted Return." TG we-Calculate. 2026. https://we-calculate.com/calculator/sharpe-ratio-calculator.
TG we-Calculate Editorial Team, "Sharpe Ratio Calculator — Risk-Adjusted Return," TG we-Calculate, 2026. [Online]. Available: https://we-calculate.com/calculator/sharpe-ratio-calculator
@misc{wecalculate_sharpe_ratio_calculator, title = {Sharpe Ratio Calculator — Risk-Adjusted Return}, author = {{TG we-Calculate Editorial Team}}, howpublished = {\url{https://we-calculate.com/calculator/sharpe-ratio-calculator}}, year = {2026}, note = {TG we-Calculate} }
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