Sharpe Ratio Calculator
The Sharpe ratio measures how much return a strategy earned per unit of volatility, above what risk-free cash would have paid — the standard way to compare results that took different amounts of risk. It ranks return against wobble, not durability: it assumes roughly-normal returns and treats big upside swings as harshly as drawdowns, so it understates spiky winners and flatters anything hiding rare, severe losses.
Sharpe = (annualised return − the risk-free rate) ÷ annualised volatility (the standard deviation of returns). Subtracting the risk-free rate isolates the reward for taking risk; dividing by volatility states it per unit of the bumpiness endured to earn it.
Worked example: A 12% annual return with a 4% risk-free rate and 15% volatility gives (12 − 4) ÷ 15 = 0.53 — just over half a unit of excess return for each unit of volatility, a middling, unremarkable figure, and far more common than the spectacular numbers backtests advertise.
Sharpe ranks return against volatility and nothing else — it is silent on whether an edge persists, and a high backtest figure almost always shrinks once live costs and fresh data arrive. Educational tool, not advice.
the return failed to clear the risk-free rate, so the volatility endured bought nothing — risk taken, reward absent.
some reward for the risk, but little per unit of volatility; common and unremarkable for real, honest strategies over a full cycle.
a respectable risk-adjusted result; sustaining even this across many live years is itself uncommon — most genuine long-run records sit below it.
rarer still to sustain live, and even a long sample can flatter a strategy whose rare, severe losses Sharpe cannot see.
rare over long live periods; on a backtest it points more often to overfitting or too short a sample than to a durable edge.
Rough historical ranges, not thresholds to trade on — and not a measurement of any strategy on this site. Because Sharpe assumes roughly-normal returns, a figure can look great while hiding tail risk, so a very high number is a reason to look harder, not a trophy.
How is the Sharpe ratio calculated?
Subtract the risk-free rate from the annualised return, then divide by the annualised volatility. The subtraction strips out what cash alone would have paid, and the division states the leftover reward per unit of the price swings endured to earn it — so 0.53 is roughly half a unit of excess return per unit of volatility.
What separates a good Sharpe ratio from a misleading one?
Historically, a figure around 1 is a solid long-run result and anything sustained above 2 is uncommon — but a number alone says little. A high ratio built on a short sample, or on returns carrying rare severe losses Sharpe cannot see, misleads; a modest ratio over a long, costs-included, out-of-sample record is more trustworthy than a spectacular one over a few months.
Why is a very high Sharpe ratio a warning sign?
Because it is rare to sustain honestly. Over long live periods even strong managers seldom hold a Sharpe above 2–3, so a backtest showing 4 or 5 usually means the rules were overfit to the past or measured over too short a window — and since Sharpe treats hidden tail risk kindly, an eye-catching figure can mask a strategy prone to rare, severe losses.
Read more: What's a good Sharpe ratio? →
A free, interactive calculator for any blog, newsletter or forum — same numbers as here, and it links back.
<iframe src="https://stratsemble.com/embed/tools/sharpe-ratio-calculator" width="460" height="410" style="border:0;border-radius:12px;max-width:100%" loading="lazy" title="Sharpe ratio calculator — Stratsemble"></iframe>A calculator shows what a rule should do on paper. A backtest is how you find the rare few that actually beat simply buying and holding — costs on, losses shown, no look-ahead — so when you build one that survives, you'll know it isn't a fake edge, and can prove it forward before you risk real money. It won't tell you you'll win — nothing honest can.