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Risk-Adjusted Return Calculator

Measure how much return you're earning per unit of risk with the Sharpe ratio.

How it is calculated

Two subtractions and one division, all in percent:

excess return = Rp − Rf
Sharpe ratio = (Rp − Rf) ÷ σ

Rp is the portfolio's return, Rf the return of a risk-free asset and σ the standard deviation of the portfolio's returns, all as percentages over the same period (for example, all annual). Use matching periods for the three numbers; the tool does not convert between monthly and annual figures. Volatility must be above zero, and a portfolio return below −100% is rejected because no portfolio can lose more than everything; in both cases, and for an empty field, nothing is shown. A return below the risk-free rate gives a negative excess return and a negative Sharpe ratio. The Sharpe ratio is shown with two decimals. It is a ratio, not a percentage.

Worked example

A portfolio earned 12% in a year, the risk-free rate was 4% and the standard deviation of its returns was 16%. Excess return = 12 − 4 = 8.00%. Sharpe ratio = 8 ÷ 16 = 0.50. That means the portfolio earned half a percentage point of extra return for every percentage point of volatility. If the same portfolio had earned only 3%, the excess return would be -1.00% and the ratio -0.06, meaning it paid less than the risk-free asset.

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Common mistakes

  • Mixing periods, for example a monthly return with an annual volatility. All three inputs must cover the same period, or the ratio is meaningless.
  • Using the portfolio's total return in the risk-free field or leaving the risk-free rate at zero. A zero rate gives an excess return equal to the whole return and flatters the ratio.
  • Entering variance or the price range instead of standard deviation. The third field is the standard deviation of returns, in percent, and it must be above zero.
  • Comparing a Sharpe ratio between two investments measured over different periods or asset classes. The number depends on the period used for volatility.
  • Typing a return as a fraction, such as 0.12 for 12%. The fields are in percent, so 0.12 is read as 0.12% and the ratio comes out near zero or negative.

About this calculator

The Sharpe ratio, developed by Nobel laureate William Sharpe, measures risk-adjusted return as (portfolio return − risk-free rate) ÷ standard deviation of returns. The numerator, return minus the risk-free rate, is the portfolio's excess return — the reward earned above what you could get from a risk-free asset like a Treasury bill — and dividing it by volatility expresses that reward per unit of risk taken.

Portfolio managers, financial advisors, and fund rating services (including Morningstar) use the Sharpe ratio to compare investments that have different risk profiles on an equal footing: a fund returning 12% with high volatility can have a worse risk-adjusted score than a fund returning 8% with low volatility. A Sharpe ratio above 1 is generally considered good, above 2 very good, and above 3 excellent, though the right benchmark depends on the asset class and time horizon being compared.

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