Sharpe Ratio Calculator

How to Calculate Sharpe Ratio

Calculating the Sharpe ratio of a investment can be done with the following variables:

1. Potential return on investment percentage


2. Risk free return percentage


3. Standard deviation

• SR = Sharpe ratio


• RP = Risk premium (calculated by subtracting the risk free return from the ROI)


• SD = Standard deviation

Understanding Your Results

Your results from this tool will be two different values. Risk premium and sharpe ratio. The risk premium is defining how much percentage difference there is between your ROI and risk free return essentially. The sharpe ratio is a number that will help you understand the possible return based on a risk-adjusted system. Generally, a sharpe ratio below 1 will be seen as a suboptimal opportunity as the return does not compensate adequately for the risk. A sharpe ratio from 1 to 1.99 can be seen as acceptable and will often be where the number falls within if it is above 1.0. Then, 2 to 2.99 is a very good opportunity based on the risk presented. Finally, anything 3.0 or more will be an excellent opportunity.

How to Use the Sharpe Ratio Tool

The Sharpe ratio can be a useful metric when investing and making important decisions for your money. You can use this tool to easily calculate this value. The steps involved with using this tool include:

1. Enter the potential return on investment.


2. Enter the risk free return that there is (this can be something like government bonds).


3. Enter the standard deviation of the account (this represents the volatility of the portfolio's returns).


4. Hit the calculate button and instantly get your results.

Calculation Example

Let's say you have a government bond that you are currently investing all of your money into. You have heard of a new investment account that can potentially get you a better return but you first want to evaluate if it is worth it. We can use this tool to help us understand this better. Our bond is paying up 1.5% and the new investment would pay us about 4% but it can fluctuate so it has a standard deviation of 2%. We can plug these numbers into the fields on this tool and then hit calculate. When we do we learn that the Sharpe ratio is 1.25 and the risk premium is 2.5%.