How to use the Sharpe ratio calculator
There are two tools, depending on the data you have.
From annual figures is the quick version. Enter the annual return, the risk-free rate and the annual volatility (standard deviation), for example from a fund factsheet, and the Sharpe ratio appears immediately.
From a return series does the full calculation from raw data:
- Paste the returns in percent, one per line or separated by commas. A column copied from a spreadsheet works. The example contains 36 monthly returns.
- Choose the period each return covers: daily, weekly, monthly, quarterly or yearly. This sets the annualization factor.
- Enter the annual risk-free rate. The calculator converts it to the same period as your returns.
- Choose the rolling window for the chart, for example 12 periods for a one-year rolling Sharpe on monthly data.
The results include the annualized Sharpe ratio with a 95% confidence range, the compound annual return, volatility, maximum drawdown and the share of positive periods.
The Sharpe ratio formula
From a series of periodic returns, the calculator computes the average excess return per period and divides it by the standard deviation of the returns, then annualizes:
Worked examples
Annual figures. A fund returned 12% a year with 16% volatility while Treasury bills paid 4%. The excess return is +8.00%, and the Sharpe ratio is 0.50. To reach a Sharpe ratio of 1.0 at the same volatility, the fund would need to return 20.00% a year.
A return series. The 36 monthly returns in the example average +0.87% a month with a standard deviation of 2.09%. Annualized, that is a compound return of +10.70% and volatility of 7.24%. With a 4% risk-free rate, the annualized Sharpe ratio is 0.90.
What is a good Sharpe ratio?
| Sharpe ratio | What it usually means |
|---|---|
| Below 0 | The portfolio earned less than cash. In the example, a 3% return gives -0.06. |
| 0 to 0.5 | Weak. Little reward for the risk taken. |
| 0.5 to 1.0 | Acceptable. Broad stock indices have historically sat near the bottom of this range. |
| 1.0 to 2.0 | Good. Strong return for the volatility. |
| 2.0 to 3.0 | Very good. Rare over many years. |
| Above 3.0 | Exceptional. Check for errors, smoothed prices or a short sample. |
These ranges are rules of thumb, not standards. A Sharpe ratio means most when you compare strategies measured over the same period, with the same frequency of data and the same risk-free rate.
Why the estimate is uncertain
A Sharpe ratio calculated from a sample of returns is an estimate, and with a few years of data it is a rough one. The calculator shows a 95% confidence range based on the standard error of the Sharpe ratio (Lo, 2002). For the 36 monthly returns in the example, the true Sharpe ratio could plausibly lie anywhere from -0.25 to 2.05.
That range is wide enough to include both a mediocre strategy and an excellent one. It is the main reason three years of returns rarely prove much about skill, and why quantitative traders adjust for the number of strategies they tested, using measures such as the deflated Sharpe ratio, before trusting a backtest.
The rolling Sharpe ratio
The chart under the series calculator shows the Sharpe ratio over a moving window. A strategy whose rolling Sharpe ratio stays stable is more convincing than one whose overall figure comes from a single strong period. Large swings are normal for short windows, because each point is estimated from only a few returns.
Things the Sharpe ratio does not capture
- Leverage does not change it. Doubling every position doubles both the excess return and the volatility, so the Sharpe ratio stays the same: a 20% return with 32% volatility also gives 0.50. The ratio tells you about the quality of the return, not about how much risk is too much.
- Volatility is not the only risk. Strategies that sell options or bet on rare events can show smooth returns and high Sharpe ratios until a single large loss. Look at the maximum drawdown and the worst periods too.
- Smoothed prices flatter it. Assets valued infrequently, such as private equity, real estate funds or some hedge funds, show artificially low volatility.
- Upside counts as risk. Big gains raise the standard deviation as much as big losses. The Sortino ratio penalizes only the downside.
- Returns are assumed to be independent. If returns trend from one period to the next, multiplying by the square root of N misstates the annual figure.