What is the Sharpe ratio?

The Sharpe ratio measures the excess return (above the risk-free rate) per unit of risk (standard deviation). A ratio above 1 is generally considered acceptable; above 2 is good; above 3 is excellent.

What should I use as the risk-free rate?

The risk-free rate is typically the yield on short-term UK government bonds (gilts). As of early 2025, short-dated gilt yields are around 4–4.5%. Use the current 3-month gilt yield as your benchmark.

What is standard deviation in investing?

Standard deviation measures how much an investment's returns vary from its average. A higher standard deviation means more volatility. UK equities have historically shown around 15–20% annual standard deviation.

Risk vs Return Estimator

Calculate the Sharpe ratio — a measure of how much return you receive per unit of risk. Enter your expected return, risk-free rate, and standard deviation (volatility) to assess an investment's risk-adjusted performance.

How it's calculated

Sharpe Ratio = (Expected Return − Risk-Free Rate) ÷ Standard Deviation
A higher Sharpe ratio means better risk-adjusted returns.

Frequently Asked Questions

What is the Sharpe ratio?: The Sharpe ratio measures the excess return (above the risk-free rate) per unit of risk (standard deviation). A ratio above 1 is generally considered acceptable; above 2 is good; above 3 is excellent.
What should I use as the risk-free rate?: The risk-free rate is typically the yield on short-term UK government bonds (gilts). As of early 2025, short-dated gilt yields are around 4–4.5%. Use the current 3-month gilt yield as your benchmark.
What is standard deviation in investing?: Standard deviation measures how much an investment's returns vary from its average. A higher standard deviation means more volatility. UK equities have historically shown around 15–20% annual standard deviation.