All toolsRisk

Sharpe Ratio Comparison

Rank strategies by the excess return they earn for each unit of volatility taken.

What is the Sharpe ratio?

The Sharpe ratio, devised by William Sharpe in 1966, measures risk-adjusted return. It is the portfolio's return minus the risk-free rate, divided by the standard deviation of those excess returns. In plain terms it tells you how much reward you earned for each unit of volatility endured. A higher Sharpe means more efficient use of risk; a ratio around 1 is respectable, above 2 is excellent and rare over long horizons.

Sharpe Ratio by Strategybar

Illustrative Sharpe ratios for five example strategies. Values are for demonstration only.

Raw returns are meaningless without the risk taken to earn them. The Sharpe ratio normalises return by volatility so a calm 8% and a wild 8% are no longer confused. This tool compares the Sharpe ratios of five illustrative strategies so you can see how risk-adjustment reshuffles a naive return ranking.

The formula and the risk-free rate

Sharpe equals excess return divided by volatility, where excess return is the strategy's return above a risk-free benchmark such as short-term government bills. Subtracting the risk-free rate matters: in a high-rate environment, a strategy must clear a higher bar before its return counts as genuine skill rather than compensation you could have earned risk-free. Ignoring the rate flatters every strategy and distorts comparisons across time.

Read more
The denominator, the standard deviation of excess returns, is what turns return into a ratio. Annualising it correctly — multiplying by the square root of the number of periods per year — is a common stumbling block; use daily volatility with daily returns and scale by the square root of 252, not 12. Mismatched frequencies are the single most frequent Sharpe-calculation error.

Why Sharpe can mislead

Sharpe assumes returns are roughly symmetric and treats upside and downside volatility identically, which penalises a strategy for its good surprises as much as its bad ones. Strategies that sell tail risk — earning small steady gains punctuated by rare crashes — can post seductive Sharpe ratios right up until the crash. The Sortino ratio, which counts only downside deviation, is one common remedy for this blind spot.

How Quadesto computes it

Quadesto computes the Sharpe ratio from your return series, letting you set the risk-free rate and the annualisation frequency so the number is comparable across strategies. It reports Sharpe alongside Sortino and Calmar for a fuller risk-adjusted view. The comparison bar chart above is built from a small table of strategy Sharpe values, and any such comparison embeds into your reports.

Build this with your own data

Upload a CSV or connect a live source, and Quadesto renders this exact chart — styled, computed, and embeddable in your reports and newsletters. Free to start.

Create free account

Related tools

Equity Curve Chart

Open tool

Maximum Drawdown Calculator

Open tool

Returns Distribution Chart

Open tool

Beta Coefficient Chart

Open tool

Explore all free financial tools, browse the finance glossary, or see how teams use Quadesto.

Frequently asked questions

What is a good Sharpe ratio?
As a rough guide, below 1 is unremarkable, around 1 is solid, 2 is very good and above 3 is exceptional and hard to sustain. Context matters — leverage, fees and the measurement window all affect it — so compare like-for-like over the same period and frequency.
How do you calculate the Sharpe ratio?
Subtract the risk-free rate from the portfolio return to get excess return, then divide by the standard deviation of those excess returns. Annualise consistently: pair daily returns with daily volatility scaled by the square root of 252. The result is reward per unit of total volatility.
Why subtract the risk-free rate?
Because a portion of any return could have been earned risklessly in government bills. Subtracting the risk-free rate isolates the return attributable to taking risk. When rates are high this bar rises, so the same nominal return produces a lower, more honest Sharpe ratio.
What is the difference between Sharpe and Sortino?
Sharpe divides excess return by total volatility, penalising upside and downside swings equally. Sortino divides by downside deviation only, so it does not punish a strategy for large gains. Sortino is often preferred for strategies with asymmetric or skewed return profiles.
Can I compute the Sharpe ratio of my portfolio?
Yes. Upload your return series to Quadesto, set the risk-free rate and frequency, and the engine returns the Sharpe ratio along with Sortino and Calmar. Compare several strategies on one bar chart and embed the result in reports.