AlgovestIQRisk-adjusted return
Enter an annual return, a risk-free rate and annual volatility for the same period to get the Sharpe ratio: how much return above cash each unit of volatility earned. Use an average annual return here, not a CAGR.
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Sharpe ratio = (average annual return - risk-free rate) / annual volatility
With zero volatility the ratio has no finite value, so none is shown.
Sharpe Ratio
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ContinueSharpe ratio measures excess return per unit of volatility. A realized Sharpe ratio is computed from a return series: take each period's return minus the risk-free rate for that period, then divide the mean of those excess returns by their standard deviation. Annualizing multiplies the mean by the number of periods per year and the standard deviation by its square root, so the periodic ratio is scaled by the square root of periods per year. This calculator takes the three annualized figures directly. With zero volatility the ratio has no finite value, so none is shown.
Sharpe ratio = (average annual return - risk-free rate) / annual volatility
Realized Sharpe = mean(periodic excess return) / standard deviation(periodic excess return) x square root(periods per year)
Annual volatility = periodic standard deviation x square root(periods per year)
A portfolio returned 10% a year with 15% annual volatility while cash paid 4%. Its excess return is 6 percentage points, and 6 / 15 gives a Sharpe ratio of 0.40.
A second portfolio returning 8% with 6% volatility has a Sharpe ratio of (8 - 4) / 6 = 0.67: less return, but more return for each unit of risk.
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Subtract the risk-free rate from the average annual return and divide by annual volatility: (10% - 4%) / 15% = 0.40. From a return series, divide the mean periodic excess return by its standard deviation, then multiply by the square root of periods per year (about 3.46 for monthly returns).
Not interchangeably. The Sharpe ratio uses the mean of periodic returns, and CAGR is a compounded (geometric) rate that sits below the mean whenever returns vary. The more volatile the investment, the larger the gap, so using CAGR understates the ratio most for the riskiest assets.
A Sharpe ratio above 1.0 is often considered good, above 2.0 is very strong, and negative Sharpe means the return did not compensate for the risk-free alternative.
No. Sharpe should be paired with maximum drawdown, concentration, correlation, and the investment time window.
No. The result is a calculation from the return, risk-free rate and volatility you enter. A ratio measured over one period may not hold in the next.