Sharpe Ratio Calculator
This calculator measures the Sharpe Ratio — a financial metric that evaluates the risk-adjusted return of an investment. It’s widely used by investors, analysts, and portfolio managers to compare the efficiency of different assets or funds.
Risk-Adjusted Return (Sharpe Ratio) Calculator
Formula of the Sharpe Ratio Calculator
$$\text{Sharpe Ratio} = \frac{R_p – R_f}{\sigma_p}$$
Where:
- $$R_p$$ = Expected portfolio return
- $$R_f$$ = Risk-free rate
- $$\sigma_p$$ = Standard deviation (volatility) of portfolio return
Explanation:
The Sharpe Ratio shows how much excess return you receive for the extra volatility you endure. A higher ratio indicates a better risk-adjusted performance.
Sharpe Ratio is a powerful tool for portfolio optimization. It helps investors:
- Compare funds or strategies with similar returns but different risks
- Assess whether higher returns justify higher volatility
- Make smarter investment decisions
Example Variables:
- Portfolio Return: 12%
- Risk-Free Rate: 2%
- Standard Deviation: 10%
- Sharpe Ratio = (0.12 − 0.02) / 0.10 = 1.0
Interpretation:
- < 1 = suboptimal risk-adjusted return
- 1–2 = acceptable/good
- > 2 = excellent risk-adjusted performance
Use Cases:
- Mutual fund comparison
- Hedge fund evaluation
- Personal investment portfolio analysis