Sharpe Ratio is a performance indicator that shows the investment portfolio's efficacy relative to its risk. It helps investors understand whether a higher portfolio's return is due to a higher risk or a result of a better investment decision.
What the Sharpe Ratio Can Tell You
When comparing funds or portfolios, investors should take into consideration not only absolute returns but also risks. While one portfolio or fund could have higher returns, it is only a good investment if those higher returns do not come with additional risk.
Generally speaking, the higher the Sharpe Ratio, the higher the risk-adjusted performance of the portfolio.
- A negative Sharpe ratio means that the risk-free rate is higher than the portfolio's return. This value does not convey any meaningful information.
- A Sharpe ratio between 0 and 1.0 is considered sub-optimal.
- A Sharpe ratio greater than 1.0 is considered acceptable.
- A Sharpe ratio higher than 2.0 is considered very good.
- A Sharpe ratio of 3.0 or higher is considered excellent.
Sharpe Ratio Formula
— Return of portfolio
— Risk-free rate
— Standard deviation of portfolio excess returns
Sharpe Ratio calculator
To calculate Sharpe ratio for particular assets, add them to the portfolio below. Alternatively, you can choose one of the existing lazy portfolios and use it for calculations.
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Sharpe Ratio Settings