Sharpe Ratio Calculator
Calculate the Sharpe ratio, the standard measure of risk-adjusted return. Enter an investment's expected return, the risk-free rate and its volatility (standard deviation). The result shows how much extra return you get for each unit of risk, so you can compare a cautious fund with a racier one on equal terms.
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 compares your return to your risk. It takes the return above a safe investment, such as a government bond, and divides it by how much your returns swing up and down. A ratio above 1 is generally considered acceptable, above 2 is good and above 3 is excellent. Two funds with the same headline return can score very differently if one is much more volatile.
- What is the Sharpe ratio for a 10% return, 4.5% risk-free rate and 15% volatility?
- The excess return is 10% minus 4.5%, which is 5.5%. Dividing that by 15% volatility gives a Sharpe ratio of 0.37. That is a modest reward for the risk taken. A fund with the same 10% return but 8% volatility would score 0.69 on the same risk-free rate, because it delivers that return with far smaller swings.
- What should I use as the risk-free rate?
- Use the yield on short-dated UK government bonds (gilts) or the Bank of England base rate. Both move, so look up the current figure on the day rather than relying on a remembered number. The risk-free rate is what you could earn with almost no risk, and the Sharpe ratio measures what an investment pays you above it.
- 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, while cash and short-dated bonds sit well below 5%.