Sharpe Ratio Calculator
Sharpe Ratio FAQ
What is a good Sharpe Ratio?
Generally, a Sharpe Ratio above 1 is acceptable, above 2 is very good, and above 3 is considered excellent.
Why is the risk-free rate used?
It represents the return from a virtually riskless investment, such as government bonds, providing a baseline for comparison.
Can the Sharpe Ratio be negative?
Yes. A negative Sharpe Ratio means the portfolio underperforms the risk-free rate, which indicates poor performance.
Is a higher Sharpe Ratio always better?
Generally yes, but it also depends on investment goals and context. A very high ratio may not be sustainable long-term.
Is the Sharpe Ratio reliable in crypto?
It’s useful, but crypto’s high volatility and fat-tail risks mean the Sharpe Ratio should be complemented with other metrics.
What’s the difference between Sharpe and Sortino Ratio?
The Sortino Ratio only penalizes downside volatility, while the Sharpe Ratio considers both upside and downside volatility.
What is the Sharpe Ratio?
The Sharpe Ratio is one of the most widely used metrics in finance to evaluate the risk-adjusted performance of an investment or trading strategy. It was developed by Nobel laureate William F. Sharpe and has become a standard measure for both institutional investors and retail traders.
The formula for the Sharpe Ratio is:
Sharpe Ratio = (Average Portfolio Return - Risk-Free Rate) / Standard Deviation of Returns
The numerator represents the "excess return" of the portfolio compared to a risk-free investment such as government bonds or U.S. Treasuries. The denominator measures how volatile or risky those returns are, expressed as the standard deviation. The result is a single number that tells you how much return you are earning for every unit of risk taken.
A higher Sharpe Ratio generally indicates better risk-adjusted performance. For example, a portfolio with a Sharpe Ratio of 2 is typically considered superior to one with a ratio of 1, because it delivers more return per unit of risk. A Sharpe Ratio below 1 is often considered suboptimal, while values above 2 or 3 are exceptional.
In cryptocurrency trading, where volatility is significantly higher than in traditional markets, the Sharpe Ratio becomes an even more valuable tool. It allows traders to compare strategies not just by raw returns but also by the risks taken to achieve those returns. For instance, two traders may both generate 20% annual returns, but if one achieves it with much less volatility, their strategy will score a higher Sharpe Ratio and is therefore more efficient.
The Sharpe Ratio is not without limitations. It assumes returns are normally distributed and does not account for skewness or tail risks, which are common in crypto markets. Nonetheless, it remains one of the most practical and popular ways to compare risk-adjusted returns across different investments, funds, or strategies.