A return by itself says nothing about how bumpy the ride was to get it. The Sharpe ratio divides the return earned above a safe baseline by how much that return actually swung around, so two very different portfolios can be compared on one number.
How it works
Subtract the risk-free rate from the portfolio’s return to get the “excess return” — the part actually earned for taking risk — then divide by the standard deviation of that return, the measure of how much it swings year to year. A higher ratio means more return for each unit of swing endured to get it.
Reading the number
Rough, widely used bands: below 0 means the risk taken was not rewarded at all; 0–1 is sub-optimal; 1–2 is good; 2–3 is very good; above 3 is rare and excellent. These are conventions from practice, not a formal threshold.
How to use this calculator
- Enter the portfolio’s return over the period you’re measuring.
- Enter the risk-free rate for the same period.
- Enter the standard deviation of the portfolio’s returns.
Frequently asked questions
Where does the standard deviation figure come from?
It is calculated from a series of past returns (monthly or annual), not a single number you can look up for most individual stocks — brokerage and fund-tracking tools usually publish it for funds and portfolios.
Can the Sharpe ratio be negative?
Yes — whenever the return earned was below the risk-free rate, meaning the risk taken actively hurt rather than helped.
Is a higher Sharpe ratio always better?
For comparing similar portfolios, yes — but it assumes returns are reasonably well-behaved statistically, and it can be distorted by portfolios with unusual, lopsided risk patterns.
How is this different from just comparing total returns?
Total return alone rewards taking on more risk with no penalty. The Sharpe ratio can rank a lower-return, much steadier portfolio above a higher-return, wildly swinging one.
