What is the Sharpe ratio?

It is the average excess return (over the risk-free rate) divided by the standard deviation of returns — profit earned per unit of volatility taken. Higher is better.

What counts as a good Sharpe ratio?

Rules of thumb: below 1 is modest, 1–2 is good, 2–3 is very good and above 3 is exceptional (and worth double-checking for look-ahead bias or stale pricing).

How is the Sortino ratio different?

Sortino replaces total standard deviation with downside deviation, so only returns below the target (the risk-free rate here) count as risk. It rewards strategies whose volatility is mostly upside.

How is the ratio annualised?

Multiply the per-period ratio by the square root of periods per year: √252 for trading days, √52 for weeks, √12 for months. This assumes returns are roughly independent between periods.

What risk-free rate should I use?

A short government bill yield (e.g. the 3-month T-bill) matching your currency is standard. For short samples or rough comparisons many traders simply use 0%.

How many returns do I need for a meaningful ratio?

More is better — a Sharpe estimated from six months of data has a very wide confidence interval. Treat anything under ~30 periods as indicative only.

Risk & Money Management

Sharpe Ratio Calculator

Calculate the Sharpe ratio, Sortino ratio and maximum drawdown from a list of period returns, with a risk-free rate and automatic annualisation.

The Sharpe ratio is a strategy's average excess return divided by the standard deviation of its returns — profit per unit of volatility taken.

Annualised Sharpe ratio

1.74

Annualised Sortino: 4.43
Per-period Sharpe: 0.5
Mean return: 1.17%
Std deviation: 2.32%
Max drawdown: 2%
Total return: 7.07%

6 periods; annualised with √(periods per year).

Worked example

Six monthly returns: +2%, −1%, +3%, +1%, −2%, +4%, with the risk-free rate at 0%.

Mean monthly return: 7% ÷ 6 = 1.17%
Standard deviation (sample): 2.32%
Monthly Sharpe: 1.17% ÷ 2.32% = 0.50
Annualised Sharpe: 0.50 × √12 = 1.74
Annualised Sortino: 1.28 × √12 = 4.43

The series earns an annualised Sharpe of about 1.74. The Sortino ratio (4.43) is much higher because only the two losing months count toward downside deviation — the strategy's volatility is mostly to the upside.

How this is calculated

Every return is first reduced by the per-period risk-free rate (annual rate ÷ periods per year) to get excess returns. Then:

Sharpe = mean(excess) ÷ sampleStd(excess)
Sortino = mean(excess) ÷ downsideDeviation
annualised = per-period × √(periods per year)

Downside deviation is √(mean(min(excess, 0)²)) over the full sample — only below-target periods contribute risk, which is why Sortino exceeds Sharpe for strategies with upside-heavy volatility.

Max drawdown compounds the returns into an equity curve and takes the worst peak-to-trough decline; total return is the compounded product of all periods.

When to use this calculator

Use this after you have a run of period returns — monthly account statements, a backtest's daily P&L — and want a risk-adjusted score instead of a raw return figure. Two strategies with the same total gain can have very different Sharpe ratios, and the higher one made that money with less turbulence.

It is the standard way to compare across strategies, timeframes or managers. Because the ratio annualises with the square root of the period count, a daily, weekly and monthly series all land on comparable footing once annualised.

Check the Sortino ratio alongside: if it is far above the Sharpe, most of the volatility penalising the Sharpe was upside — common for trend-following and long-option styles whose best months are outliers.

Common mistakes

Annualising with the wrong factor — multiply the per-period Sharpe by √252 for daily returns, √52 for weekly and √12 for monthly, not by the period count itself.
Comparing Sharpe ratios computed over different sample lengths or frequencies as if they were equivalent.
Ignoring that Sharpe penalises upside volatility too — a strategy with big winning outliers can look worse on Sharpe than Sortino for the same drawdowns.

Frequently asked questions

What is the Sharpe ratio?: It is the average excess return (over the risk-free rate) divided by the standard deviation of returns — profit earned per unit of volatility taken. Higher is better.
What counts as a good Sharpe ratio?: Rules of thumb: below 1 is modest, 1–2 is good, 2–3 is very good and above 3 is exceptional (and worth double-checking for look-ahead bias or stale pricing).
How is the Sortino ratio different?: Sortino replaces total standard deviation with downside deviation, so only returns below the target (the risk-free rate here) count as risk. It rewards strategies whose volatility is mostly upside.
How is the ratio annualised?: Multiply the per-period ratio by the square root of periods per year: √252 for trading days, √52 for weeks, √12 for months. This assumes returns are roughly independent between periods.
What risk-free rate should I use?: A short government bill yield (e.g. the 3-month T-bill) matching your currency is standard. For short samples or rough comparisons many traders simply use 0%.
How many returns do I need for a meaningful ratio?: More is better — a Sharpe estimated from six months of data has a very wide confidence interval. Treat anything under ~30 periods as indicative only.