How this number is made
The Sharpe ratio is the extra return over a risk-free rate, divided by volatility. A higher number means more return per unit of swing. You have to bring the volatility. This page does not compute a standard deviation from a list of months. A ratio from one good year is not a trait of the portfolio.
- Use the same period for the return and the volatility.
- The risk-free rate is usually a Treasury bill for that period. Type the one you are comparing against.
Formula
Sharpe = (portfolio return − risk-free rate) ÷ volatility.
Worked example
With the figures already in the form, sharpe ratio is 0.42.
Questions
What is a good Sharpe?
There is no universal line. Compare two portfolios over the same period rather than hunting a magic number.
Why can it be negative?
The portfolio earned less than the risk-free rate. The swing did not pay.