Calculate the Sharpe ratio for investment performance evaluation with risk-free rate, portfolio return, and standard deviation inputs.
The Sharpe ratio answers one question: how much return did an investment earn for each unit of risk it took. Enter the portfolio's return, a risk-free rate (typically a short-term Treasury yield), and the standard deviation of returns, and the tool divides the excess return by that volatility. The result is a single number that lets you compare investments with very different risk levels on equal footing. The thing most people get wrong is mixing time frames: a ratio built from monthly data is not comparable to one built from annual data, because the value scales with the square root of the number of periods per year.
A concrete input and expected output from the current implementation.
Input
Portfolio return: 12% | Risk-free rate: 2% | Standard deviation: 10%
Expected output
Sharpe ratio: 1.00
The tool computes (0.12 - 0.02) / 0.10 = 0.10 / 0.10 = 1.00. The portfolio earned a 10 percentage point excess return while carrying 10 percentage points of volatility, so it produced exactly one unit of excess return per unit of risk.
Sharpe ratio = (portfolio return - risk-free rate) / standard deviation. The subtraction in the numerator is the excess return, the reward earned beyond what a cash-like asset paid over the same period. Dividing by volatility expresses that reward per unit of risk, so two strategies with the same return but different swings score differently. All three inputs must use the same units, usually annual percentages, for a meaningful result.
Volatility grows with the square root of time while returns grow linearly, so a strategy measured on monthly data scores about 3.46 times lower than the same strategy measured on annual data. A monthly Sharpe of 0.29 and an annual Sharpe of 1.00 describe identical performance. When you see a published ratio, first ask what period the inputs cover; annualized figures are the usual convention.
A common rule of thumb: above 1.0 is acceptable, above 2.0 is very good, and above 3.0 is excellent. But those anchors assume annualized figures. A monthly Sharpe of 0.3 is not bad compared with an annual 1.0; it is the same performance on a different clock. Compare only ratios computed on the same data frequency and roughly the same period.
No. It measures return per unit of total volatility, not total return, so a low-volatility strategy with modest returns can rank above a higher-returning one. It also ignores how losses are distributed: two portfolios with the same volatility can have very different drawdown profiles. Use it alongside total return, maximum drawdown, and downside risk measures.
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