Enter your investment return, risk-free rate, and the standard deviation of the portfolio to calculate the Sharpe ratio of the portfolio.
- Risk Premium Calculator
- Default Risk Premium Calculator
- ROI Calculator – Return on Investment
- Risk-Adjusted Return Calculator
Sharpe Ratio Formula
The following formula can be used to calculate the Sharpe ratio of an investment.
SR = (IR - RFR) / SD
- Where SR is the Sharpe ratio
- IR is the investment return
- RFR is the risk-free return
- SD is the standard deviation
To calculate the shape ratio, subtract the risk-free return from the investment return, then divide it by the standard deviation.
Sharpe Ratio Definition
The Sharpe Ratio is a widely used financial metric that helps investors evaluate the risk-adjusted return of an investment or portfolio. It measures how well an investment has performed relative to the level of risk taken.
The ratio is calculated by taking the excess return of the investment over the risk-free rate and dividing it by the standard deviation of the investment’s returns. The return on a government bond or a similar low-risk investment typically represents the risk-free rate.
By incorporating both return and risk into a single metric, the Sharpe Ratio enables investors to compare different investments or portfolios on an equal footing.
It allows them to assess whether an investment generated higher returns by taking on more risk or achieved similar returns with lower risk.
A higher Sharpe Ratio indicates better risk-adjusted performance, as it suggests that the investment has generated higher returns for each unit of risk taken.
A lower ratio implies that the investment provided lower returns for the level of risk undertaken.