# Sharpe Ratio Calculator

LAST UPDATE: September 25th, 2020

## Definition – What is the Sharpe Ratio?

The Sharpe Ratio is the average return above the risk-free rate of return on an investment. The risk free rate of return is an investment in a US Treasury.

A high sharpe ratio means that the investment is making a lot of money above the risk-free rate of return.

A low sharpe ratio means that the investment is making only a little money above the risk-free rate of return.

A negative sharpe ratio means that the investment is making less money than risk-free investment such as a US Treasury.

## Formula – How to calculate the Sharpe Ratio

Sharpe Ratio = (Expected Return – Risk Free Rate) / Portfolio Standard Deviation

Convert all percentages to a decimal (divide by 100%).

### Example

A stock has an expected return of 4.55%. The risk-free rate is 1.75%. The portfolio has a standard deviation of 0.20.

Sharpe Ratio = (0.0455 – 0.0175) / 0.20 = 0.028 / 0.20 = 0.14

Therefore, this stock’s Sharpe Ratio is 0.14, or 14%.