Sharpe Ratio Calculator

Risk-adjusted return is the question every serious investor eventually faces: was the gain worth the bumpy ride? This tool answers it by measuring how much excess return your portfolio earned for each unit of volatility it absorbed. If you want to know whether a year's performance actually compensated you for the swings you endured, comparing it against a safe benchmark such as the yield on 3-month Treasury bills gives you a clear yardstick.

The formula subtracts the risk-free rate from your portfolio return and divides the result by the portfolio's standard deviation, written as (Rp - Rf) / σp. Here Rp is the portfolio return, Rf is the risk-free rate, and σp is the standard deviation of the portfolio's returns. The larger the resulting number, the more return you captured per unit of risk taken on.

Two errors tend to distort the result. Choosing a risk-free rate that ignores current conditions or your actual investment horizon skews the numerator, and computing standard deviation over too brief a window understates the volatility a portfolio really carries over time. A strong reading reflects past efficiency rather than a forecast, so treat it as a historical lens on how well your returns paid for their risk, not a promise about what comes next.