Sharpe Ratio Calculator
Annualise a strategy's risk-adjusted return from its periodic mean return, volatility and the risk-free rate.
Quick answer: The Sharpe ratio measures excess return per unit of total volatility. This tool takes the mean and standard deviation of your periodic returns, subtracts the per-period risk-free rate from the mean, divides by the standard deviation, and scales the result by the square root of the number of periods per year to give an annualised figure. Higher is better; it rewards steady returns and penalises volatility.
How to use it
Enter the mean and standard deviation of your returns for one period (for daily data use daily figures) and the number of such periods in a year (about 252 trading days). The annual risk-free rate is converted to a per-period rate before subtraction. The output is the annualised Sharpe ratio. Convention: the risk-free rate is divided by periods per year to match the period of your returns.
Formula
Sharpe = ( ( Mean − Risk-free ÷ Periods ) ÷ Std deviation ) × √Periods
Mean and Std deviation are per-period percentages; the annual risk-free rate is divided by periods per year to bring it to the same period. Percentage units cancel in the ratio.
Limitations — what this calculator does not model
- Assumes returns are roughly normal and independent; it understates risk for skewed, fat-tailed strategies such as option selling.
- Penalises upside volatility as much as downside — the Sortino ratio addresses this.
- Uses a simple linear annualisation that ignores autocorrelation and the compounding of the risk-free rate.
- A short sample gives a noisy Sharpe with a wide standard error; treat brief live readings as indicative only.
Frequently asked questions
Why divide the risk-free rate by periods?
Your returns are per-period (for example daily) but the risk-free rate is quoted annually. Dividing the annual rate by the number of periods per year brings it onto the same per-period basis before subtraction. This is a simple linear convention, adequate for illustration.
What periods per year should I use?
Use the count that matches your return period: about 252 for daily trading returns, 52 for weekly, 12 for monthly. Intraday strategies use far larger numbers.
Should a live system track Sharpe on realised returns?
Yes, as a monitoring signal rather than a target. Computing a rolling Sharpe on the live equity curve and comparing it to the backtested figure is a standard way to detect that a strategy is degrading — live Sharpe almost always sits below the backtest once real fills and costs bite.
Does Sharpe treat upside and downside the same?
Yes, and that is its main weakness. It penalises large gains as much as large losses because it uses total standard deviation. The Sortino ratio addresses this by measuring only downside deviation, which is why an ops dashboard usually shows both.
Why can option-selling systems show a misleadingly high live Sharpe?
Because they book many small premiums and rarely realise their tail, so standard deviation understates the true risk. The Sharpe looks excellent right up until a single gap event delivers the catastrophic loss the volatility estimate never captured — a reason to pair Sharpe with a hard drawdown limit in the risk engine.
How much live data before I trust a Sharpe reading?
More than most assume. Sharpe is a noisy ratio with a slowly shrinking standard error, so a figure from a few weeks of live trading is nearly uninformative. Treat short-run live Sharpe as a rough health check, not a verdict.
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