Performance Analysis
/Sharpe Ratio
Sharpe Ratio
Learn how to evaluate excess return per unit of total volatility with the Sharpe Ratio tool.
Sharpe Ratio measures how much excess return a portfolio generates for each unit of total volatility.
It is one of the most widely used risk-adjusted metrics for comparing portfolios, funds, and strategies.
Why This Matters
High absolute return can be misleading if volatility is also high. Sharpe Ratio helps assess return quality relative to total risk.
How to Use the Tool
Use this workflow in Sharpe Ratio:
1
Select Portfolio Positions
Create or choose your portfolio in the selector.
2
Choose Benchmark
Set benchmark for context in comparative plates.
3
Configure Risk-free Rate
Use US Money Market Yield (^CASHX) or switch to custom annual rate.
4
Set Lookback Period
Choose rolling window length based on your analysis horizon.
5
Calculate and Review Outputs
Run calculation and evaluate chart, ranking, and percentile context.
Tool Settings
Benchmark
Comparison baseline for supporting outputs.
Risk-free Rate Source
US Money Market Yield (^CASHX) or custom fixed rate.
Custom Risk-free Rate
Annual percent used when custom mode is selected.
Lookback Period
Rolling window for historical Sharpe computation.
Risk-free rate guidance:
US Money Market Yieldtracks changing short-rate environment through time.Custom rateis useful for alternative benchmarks or zero-rate absolute-return analysis.
Results: Section-by-Section Guide
1. Sharpe Ratio Chart
Main visual showing historical annualized Sharpe behavior across the selected rolling window.
2. Portfolio Risk-Adjusted Rank
Provides relative standing versus broader indicator universe.
3. Risk-Adjusted Returns Table
Helps compare portfolio with benchmark and inspect other complementary metrics.
4. Distribution Percentile Context
The tool shows percentile benchmarks for portfolios, equities, and ETFs. This helps interpret whether your Sharpe is median-like, top quartile, or rare outlier level.
General practical thresholds:
- above 1.0: often acceptable
- above 2.0: often very good
- above 3.0: uncommon and strong
Example
If Portfolio A has lower return than B but much lower volatility, A can still have a higher Sharpe Ratio. In that case, A delivers better excess return efficiency per unit of risk.
Best Practices
Use consistent risk-free assumptions
Changing rate source can materially affect Sharpe values.
Read with complementary metrics
Pair with Sortino or Omega to isolate downside effects.
Avoid focusing only on one period
Check rolling consistency, not only one endpoint value.
Combine with portfolio construction logic
Diversification and rebalancing often improve Sharpe stability.