What is a Sharpe Ratio?
The Sharpe ratio is a measure of risk-adjusted return that uses standard deviation as the risk metric. It’s calculated by dividing the average return on an investment by the standard deviation (volatility).
So if you made 10% per year on your money and your portfolio was volatile, then your Sharpe ratio would be less than 1%. If you made 10% per year with a low volatility portfolio, then your Sharpe ratio would be over 1%.
The below calculator can help you calculate this metric for both stocks and ETFs. It will also show you how well or poorly an investment performed relative to its peers based on its typical volatility level over different time periods.
What is a Sharpe Ratio Calculator?
The Sharpe ratio is a measure of risk-adjusted performance, which can be used to compare the returns of an investment to those of other assets such as bonds.
The Sharpe ratio is calculated by dividing the return on an investment per unit standard deviation (volatility) of returns. It was first developed by William F. Sharpe in 1966 and later popularized by Nobel Prize winner William F. Sharpe in 1990.
How to Calculate Sharpe Ratio?
The Sharpe ratio is calculated using the formula:
Sharpe ratio = (Mean return – Risk-free rate)/Standard deviation of return
The standard deviation of return is a measure of volatility. The mean return is an average of monthly returns, while the risk-free rate is the return on a risk-free asset like U.S. Treasury bills.
How Does this Sharpe Ratio Calculator Work?
The Sharpe Ratio is a measure of the returns of an investment relative to the volatility of that investment. It’s one of the most popular ways to determine the risk-adjusted return of your portfolio, but it can be confusing and difficult to calculate on your own.
This Sharpe Ratio calculator will automatically calculate your Sharpe Ratio for you each time you input new data into your spreadsheet. Simply fill out all ten fields with a description of what each number represents, then hit “Calculate” at any time throughout this tutorial or directly in your Google Sheet!
Example of Sharpe Ratio Calculator
We can use the Sharpe Ratio Calculator to find the average return and standard deviation of our investments. Let’s assume that an investor has made two investments, A and B:
- Investment A has a beta of 0.5 and annualized expected returns of 10% with a standard deviation of 5%.
- Investment B has a beta of 1.1 and annualized expected returns of 8% with a standard deviation of 6%.
Conclusion
The Sharpe ratio is one of the most popular ways to measure risk-adjusted performance. It lets you look at the volatility of a portfolio and compare it to an index. This way, you can figure out which investments are the best deal for your money!
FAQs
Is a 0.5 Sharpe ratio good?
The higher the Sharpe ratio, the better. A 0.5 Sharpe ratio is what we’d call “average.” It’s not bad, but it’s nothing special either.
What is a healthy Sharpe ratio?
The better your Sharpe ratio is relative to other investments in a given category (stocks or bonds), the closer you’ll be able to get yourself toward that efficient frontier.
What is the Sharpe ratio of the S&P 500?
The S&P 500 has a Sharpe ratio of 0.18, which means that investors in this index have lost 18% more money than they would have if they had invested in U.S Treasuries instead. That’s not great news for anyone who owns equities!
Who has the best Sharpe ratio?
The best company is the one with the highest Sharpe ratio. They have the lowest risk, and they earn more money than other companies. The worst company is the one with a negative Sharpe ratio. They have a lot more risk than other companies, so they don’t earn as much money as them either
