Sharpe Ratio Calculator
Calculate the Sharpe ratio from a return series, plus Sortino, Calmar, maximum drawdown, volatility and the annualisation that makes periods comparable.
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Return without risk is half a number
A strategy returning twenty percent with thirty percent volatility is not obviously better than one returning ten percent with five. The Sharpe ratio, introduced by William Sharpe in 1966, divides excess return over the risk free rate by the standard deviation of returns, producing a measure of return per unit of risk. It is the most widely quoted performance statistic in asset management, and it makes strategies with different risk levels comparable in a single number.
What the ratio does not see
Standard deviation treats upside and downside movement identically, so a strategy with large gains is penalised the same as one with large losses. It also assumes returns are normally distributed, which they are not: real return series have fat tails and negative skew, so strategies that sell insurance look excellent right up until they do not. The Sortino ratio addresses the first problem by using downside deviation only, and the Calmar ratio addresses the second by dividing return by maximum drawdown, which is the loss an investor actually experiences.
Annualisation and its assumptions
A monthly Sharpe ratio is multiplied by the square root of twelve to annualise it, and a daily one by the square root of 252. That scaling assumes returns are independent between periods, which is false where there is momentum or mean reversion, and it makes an illiquid strategy with smoothed valuations look far better than it is. A reported Sharpe above three in a liquid strategy usually indicates a data problem rather than exceptional skill.
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Frequently Asked Questions
What is a good Sharpe ratio?
Above 1 is generally considered good, above 2 very good and above 3 exceptional. Broad equity indices have historically sat around 0.4 to 0.6 over long periods, which puts the commonly advertised figures in perspective.
Why does the ratio need a risk free rate?
Because the return you could earn with no risk is not skill. Subtracting it isolates the excess return the strategy actually produced. In a high rate environment this matters a great deal: a 5 percent return when cash pays 5 percent has a Sharpe of zero.
When should I use Sortino instead?
Whenever the return distribution is asymmetric, which is most of the time. Sortino divides by downside deviation only, so it does not penalise a strategy for large gains. It is the more appropriate measure for anything with option like payoffs.
What does maximum drawdown add?
It is the largest peak to trough loss, which is what an investor actually lives through and what causes them to sell at the bottom. A strategy with a good Sharpe and a 60 percent drawdown is not investable for most people regardless of the ratio.
Why is annualising a daily Sharpe problematic?
Because multiplying by the square root of 252 assumes each day is independent of the last. Any autocorrelation, and illiquid or smoothed valuations produce plenty, inflates the annualised figure substantially.
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How to Use
Paste a series of periodic returns and set the risk free rate to get risk adjusted performance metrics.
Disclaimer: This tool is provided "as is" without warranty of any kind. Results are for educational and utility purposes.
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