Measure return earned per unit of total volatility, the standard risk-adjusted return measure.
The Sharpe ratio divides excess return over the risk-free rate by total volatility, so it penalises upside and downside swings equally. A ratio above 1 is generally considered good and above 2 excellent. Comparing raw returns without adjusting for volatility rewards leverage rather than skill, which is exactly what the Sharpe ratio corrects for.
Sharpe Ratio
Sharpe Ratio = (portfolio return − risk-free rate) ÷ portfolio standard deviation
Sharpe Ratio = (portfolio return − risk-free rate) ÷ portfolio standard deviation The Sharpe ratio divides excess return over the risk-free rate by total volatility, so it penalises upside and downside swings equally. A ratio above 1 is generally considered good and above 2 excellent.
Comparing raw returns without adjusting for volatility rewards leverage rather than skill, which is exactly what the Sharpe ratio corrects for.
This calculator takes 3 inputs: Portfolio return, Risk-free rate, Portfolio standard deviation. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.