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What it calculates: Sharpe Ratio, Excess Return, Band (0 below 0 / 1 under 1 / 2 at or above 1).
Updated 5 June 2026 · Transparent assumptions
Ten points of excess return bought with fifteen points of volatility
A 12% return against a 2% risk-free rate is 10 points of excess — the part that was not available for free. Dividing by 15% of standard deviation gives 0.67: two-thirds of a point of excess return for each point of volatility endured.
The risk-free subtraction is what makes the ratio meaningful. A fund returning 12% when Treasury bills pay 2% did something; the same 12% when bills pay 11% did almost nothing. Without that subtraction, a high-return figure in a high-rate environment would flatter a manager who added no value at all.
Under 1 is common, over 2 is rare, and the number moves with the period
Conventional reading puts anything below 1 as unremarkable, 1 to 2 as good, and above 2 as excellent — but those are rules of thumb from long-run equity data, not fixed standards. A broad equity index has historically delivered something in the region of 0.4 to 0.6 over long periods, so a fund at 0.67 is not underperforming the market on this measure.
The ratio also depends on the measurement period. Computed on monthly data and annualised, it differs from one computed on annual figures, and a short window can produce a spectacular ratio purely because the period happened to be calm. Compare Sharpe ratios only when both were computed the same way over the same span.
Standard deviation punishes a good month exactly as hard as a bad one
Standard deviation measures dispersion in both directions. A fund that occasionally returns 30% in a month is penalised for it, identically to one that occasionally loses 30%. For most investors those are not the same experience, and a strategy with large positive skew can score poorly on Sharpe while being exactly what someone wanted.
The Sortino ratio replaces the denominator with downside deviation, counting only returns below a threshold. On the same 10 points of excess, a 10% downside deviation gives a Sortino of 1.00 against this Sharpe of 0.67 — and the gap between the two is itself informative, because it says how much of the volatility was upside.
A normal distribution, which market returns are not
Standard deviation summarises a distribution in one number, and it does that well only when the distribution is roughly normal. Real return series have fat tails: extreme moves happen far more often than a normal distribution predicts, and the ratio understates the risk of exactly the events that matter most.
Strategies that sell insurance-like exposure — writing options, carry trades, credit risk — are the sharpest case. They produce small steady gains and rare large losses, which yields an excellent Sharpe ratio right up until the tail event arrives. A high ratio on a short history of such a strategy is a description of the calm period, not of the risk.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.
Returns are assumptions, not guarantees. Actual results may vary because of market performance, taxes, fees, inflation, and timing. This is an educational projection, not investment advice.
Published the calculator with its formula, worked example, assumptions, limitations and a bespoke guide, and added an automated formula test suite covering it.
Verified that the risk-free rate is subtracted before dividing, since a high return in a high-rate environment is not the same achievement as the same return when cash pays nothing.
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