Sharpe Ratio Calculator
Grade return per unit of risk — Sharpe from return, risk-free rate, and volatility, plus Sortino when you have downside deviation.
Sharpe & Sortino
Live toolRead: subpar — under 1 unit of excess return per unit of risk. Bands are rough conventions (under 1 subpar, 1-2 acceptable, 2-3 strong, over 3 exceptional), not guarantees.
All inputs are annualized percent-numbers (12 means 12%). Backtested or smoothed return series inflate both ratios; short histories make them noisy.
How it works
Two portfolios both returned 12% last year. One did it with the volatility of a bond ladder, the other with the volatility of a leveraged tech bet. The Sharpe ratio separates them: it takes the return earned above the risk-free rate and divides by the volatility endured to earn it. Higher means more reward per unit of risk — 12% at 15% volatility against a 4.5% risk-free rate scores 0.50; the same 12% at 7.5% volatility scores 1.00.
The Sortino ratio is the stricter sibling. Standard deviation counts every swing as risk, including the months a strategy jumped up — Sortino swaps in downside deviation, so only below-target volatility counts against the score. Enter a downside deviation and the calculator shows both; a Sortino well above the Sharpe means most of the volatility was the pleasant kind.
The calculator also translates the number into plain words using the common conventions — under 1 subpar, 1-2 acceptable, 2-3 strong, over 3 exceptional. Those bands are folklore with mileage, not laws: a 0.5 Sharpe over twenty years (roughly the S&P 500’s historical neighborhood) beats a 3.0 Sharpe over three lucky months.
The formula
Sharpe ratio = (Rp − Rf) ÷ σ, where Rp is the annualized portfolio return, Rf the annualized risk-free rate, and σ the annualized standard deviation of returns. All three enter as percent-numbers; the percent units cancel, leaving a unitless ratio.
Sortino ratio = (Rp − Rf) ÷ downside deviation — the same numerator over volatility measured only from below-target returns.
Guards: σ (and downside deviation, when given) must be greater than 0 — zero volatility would divide by zero, and a genuinely riskless return has nothing to grade. Rp below −100% is rejected; a negative numerator is allowed and produces a negative ratio, reported as exactly that.
Worked example
Inputs: portfolio return = 18%; risk-free rate = 4.5%; standard deviation = 9%; downside deviation = 6%.
- Excess return: 18 − 4.5 = 13.5 percentage points.
- Sharpe: 13.5 ÷ 9 = 1.50 — acceptable to good by the rough conventions.
- Sortino: 13.5 ÷ 6 = 2.25 — strong; the gap over the Sharpe says a third of the measured volatility was upside.
The negative case. Return = 2%, risk-free = 4.5%, volatility = 10%: Sharpe = (2 − 4.5) ÷ 10 = −0.25. T-bills beat the portfolio. Careful ranking losers by Sharpe: at 20% volatility the same shortfall scores −0.13, which looks better despite identical underperformance and double the risk.
FAQ
What is the Sharpe ratio?
The Sharpe ratio is excess return per unit of volatility: (portfolio return − risk-free rate) ÷ standard deviation, all annualized. A portfolio returning 12% with a 4.5% risk-free rate and 15% volatility scores (12 − 4.5) ÷ 15 = 0.50 — half a point of excess return for every point of risk taken.
What is a good Sharpe ratio?
Rough conventions, not laws: below 1 is subpar, 1-2 is acceptable to good, 2-3 is strong, and above 3 is exceptional — and rare enough over long periods that it deserves a second look at the inputs. The S&P 500 has historically landed near 0.4-0.6 over multi-decade windows.
How is the Sortino ratio different?
Sortino replaces total standard deviation with downside deviation, so only below-target volatility counts as risk. A strategy returning 18% against a 4.5% risk-free rate with 9% total volatility but only 6% downside deviation scores Sharpe (18 − 4.5) ÷ 9 = 1.50 and Sortino (18 − 4.5) ÷ 6 = 2.25 — the gap shows most of its volatility was upside.
Can the Sharpe ratio be negative?
Yes — whenever the portfolio returned less than the risk-free rate. A 2% return against a 4.5% risk-free rate with 10% volatility scores (2 − 4.5) ÷ 10 = −0.25. Ranking strategies by negative Sharpe is unreliable: among losers, higher volatility makes the number look less bad.
What risk-free rate should I use?
A Treasury yield matching your measurement period — the 3-month T-bill rate is the standard choice for annual figures. Using 0% inflates every Sharpe ratio; at a 4.5% bill yield, a 10%-return, 12%-volatility portfolio scores 0.46, not the 0.83 a zero rate would suggest.
When does the Sharpe ratio mislead?
It treats upside and downside swings identically, so it penalizes strategies with big winning months. It also flatters anything with smoothed or stale pricing — illiquid funds report artificially low volatility, which inflates Sharpe. And short return histories make the estimate noisy: one year of monthly data is 12 samples.
Continue your analysis
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Educational use only — nothing here is investment, tax, or legal advice. Sharpe and Sortino describe a past return series; they do not predict future risk-adjusted performance. Both ratios assume the inputs are honest — smoothed or infrequently marked returns understate volatility and inflate the score, and short histories make any ratio noisy. US markets / USD framing throughout.