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What Is the Sharpe Ratio?

The Sharpe ratio measures how much excess return an investment earned relative to the risk (the size of its price fluctuations) it took on.

Sharpe ratio = (Portfolio return − Risk-free rate) ÷ Volatility of the portfolio (standard deviation)

A higher Sharpe ratio is generally interpreted as meaning the return earned matched or exceeded the risk taken on. It is used to compare track records not just by the size of returns, but by the balance between return and risk.

Points to keep in mind

The Sharpe ratio is ultimately a statistical measure calculated from past performance — it does not guarantee future results. The figure also varies depending on the calculation period and the risk-free rate assumed, so figures calculated under different conditions cannot be compared directly.

This article is provided for general informational purposes only and does not recommend or solicit the purchase or sale of any specific investment method or security. Final investment decisions are your own responsibility.

Frequently Asked Questions

Does a high Sharpe ratio mean an investment was managed well?
It shows that, over a specific past period, the return earned relative to the risk taken was relatively efficient — but it does not guarantee that similar performance will continue in the future. The figure also changes depending on the calculation period and assumptions used.
What does a negative Sharpe ratio mean?
It means the investment's return was lower than the return on a risk-free asset over that period.

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