Sharpe Ratio Calculator

What Is the Sharpe Ratio?

The Sharpe ratio, developed by Nobel laureate William F. Sharpe, measures how much excess return you receive for the extra volatility of holding a riskier asset. The formula is: Sharpe = (Portfolio Return - Risk-Free Rate) / Standard Deviation.

A higher Sharpe ratio is better. A ratio above 1.0 is generally considered good, above 2.0 is excellent. Negative Sharpe ratios mean the portfolio underperformed a risk-free investment.

How to Interpret Your Sharpe Ratio

Below 0.5 (Poor): You are taking on significant risk without enough compensation. Consider whether the asset is worth holding versus safer alternatives.

0.5–1.0 (Below Average): The S&P 500 averages roughly 0.5 over long periods. Warren Buffett's Berkshire Hathaway has averaged around 0.79. Hedge funds often fall in this range.

1.0–2.0 (Good): Strong risk-adjusted returns. Risk parity strategies and some factor-based portfolios achieve this range consistently.

Above 2.0 (Excellent): Rare in practice over long periods. Short-term momentum strategies may show this, but often with tail risks not captured by standard deviation.

Limitations of the Sharpe Ratio

The Sharpe ratio assumes returns follow a normal distribution and penalizes upside volatility equally with downside volatility — which is not what investors care about. It also looks backward: high past Sharpe ratios do not guarantee future performance.

The Sortino ratio addresses the upside-volatility flaw by using only downside deviation in the denominator, making it a better measure for strategies with positive skew.

Typical Sharpe Ratios for Reference