How to Calculate Sharpe Ratio
What is Sharpe Ratio?
Sharpe Ratio measures risk-adjusted return: (portfolio return - risk-free rate) / volatility. Higher is better.
Step-by-Step Guide
- 1Input portfolio return, volatility, risk-free rate
- 2Calculate Sharpe ratio
- 3Compare across portfolios/investments
Worked Examples
Input
Portfolio 10% return, 15% volatility, 2% risk-free
Result
Sharpe = (10-2)/15 = 0.53 (decent)
> 1.0 excellent, < 0.5 poor
Common Mistakes to Avoid
- ✕Using different risk-free rates
- ✕Not comparing portfolios with same time period
Frequently Asked Questions
Is Sharpe ratio universal?
Useful but assumes normal distributions; doesn't capture tail risk well.
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