Sharpe Ratio Calculator
The Sharpe ratio answers a question a raw return number cannot: how much return are you earning per unit of risk you take on? A portfolio returning 20% a year sounds great, but if it lurches around — down 15% one month, up 18% the next — most individual investors bail out near the bottom and never capture that headline figure. The Sharpe ratio collapses return and risk into one comparable number, so you can line up very different portfolios on a fair, risk-adjusted basis.
The calculation is compact. Take the portfolio's return, subtract the risk-free rate (in Vietnam a sensible benchmark is a long-term savings rate or the government bond yield), then divide by the standard deviation of returns — the standard gauge of how much the portfolio bounces around. The amount you earn above the risk-free rate is the excess return; dividing it by risk gives the Sharpe ratio. Under illustrative assumptions of a 14% return, a 4.5% risk-free rate and a 12% standard deviation, the portfolio scores a Sharpe of 0.79 — that is 9.50 percentage points of excess return divided by 12% of risk.
The rule of thumb most practitioners use: a Sharpe below 1 is below par, 1 or higher is good, 2 and up is very good, and 3+ is excellent. The calculator above takes those three numbers and instantly benchmarks them against two other illustrative portfolios. Keep in mind that every figure on this page is an illustrative assumption, not the actual performance of any fund or index.
How the calculator computes a Sharpe ratio
The core formula
Sharpe = (Rp − Rf) / σ
| Symbol | Meaning |
|---|---|
| Rp | Expected portfolio return (illustrative 14%/year) |
| Rf | Risk-free rate — your safe benchmark, e.g. a long-term savings rate or government bond yield (4.5%/year) |
| σ | Standard deviation of the portfolio's returns, measuring volatility (12%) |
| Rp − Rf | Excess return — the reward for taking on risk |
The calculator keeps all three quantities in the same annualised percentage units, so the Sharpe ratio comes out dimensionless: for every 1% of risk (standard deviation), how many percentage points of return above the safe rate does the portfolio deliver? That is exactly what the tool above does, so you can reconcile every step.
Why subtract the risk-free rate?
You always have a zero-risk option: park cash in a savings deposit or government bond and collect 4.5%. So an equity portfolio only earns its keep on the return above that safe baseline. If a portfolio returns exactly 4.5% while still bouncing around, its Sharpe is 0 — you bore risk for no extra reward.
Why divide by standard deviation?
Standard deviation measures how widely returns swing around their average. For the same excess return, the steadier portfolio earns a higher Sharpe, because investors reach that outcome more smoothly and are far more likely to stay invested. This is why a high-return but wildly volatile portfolio can score a lower Sharpe than a moderate but stable one.
What the model leaves out
The Sharpe ratio penalises all volatility equally, including the upside swings you actually want — a well-known criticism (the Sortino ratio fixes this by penalising only downside deviation). It also assumes returns are roughly normally distributed and ignores tail risk (rare but severe crashes), taxes and fees. Treat the Sharpe ratio as one lens for comparison, not a final verdict.
Worked example: comparing three portfolios by Sharpe ratio
Illustrative assumptions: a common risk-free rate of 4.5%/year; three portfolios with different returns and volatility (for illustration only, not real data).
| Portfolio | Return | Std. deviation | Excess return | Sharpe ratio | Rating |
|---|---|---|---|---|---|
| A (balanced) | 14% | 12% | 9.50 pp | 0.79 | below par |
| B (concentrated equity) | 20% | 28% | 15.50 pp | 0.55 | below par |
| C (bond-heavy) | 9% | 5% | 4.50 pp | 0.90 | below par |
Three things stand out.
- The highest return does not win. Portfolio B returns 20% — the most on the table — but its 28% standard deviation drags its Sharpe down to 0.55, below Portfolio A's 0.79 despite A returning just 14%. The extra return is not enough to pay for the jump in risk.
- Steadiness is rewarded. Portfolio C earns the least (9%) but barely moves (5% volatility), so its Sharpe climbs to 0.90 — the highest of the three. Per unit of risk taken, C is the most efficient.
- Sharpe enables a fair comparison. Judge by the return column alone and you would pick B; view it through the risk lens and C and A are the more efficient choices. That is the whole point of risk-adjusted return.
Enter the return, risk-free rate and standard deviation of a portfolio you follow to see which band it lands in. For a deeper look at where the risk is coming from, pair this with FiMo's portfolio risk and asset allocation tools.
Frequently asked questions
What is the Sharpe ratio and what does it measure?
The Sharpe ratio measures risk-adjusted return: how much excess return you earn per unit of risk (volatility) taken. The formula is Sharpe = (Rp − Rf) / σ — portfolio return minus the risk-free rate, divided by the standard deviation of returns. Illustrative example: a 14% return, a 4.5% risk-free rate and a 12% standard deviation give a Sharpe of 0.79. The higher the number, the more efficiently the portfolio turns risk into return.
What is a good Sharpe ratio?
The common rule of thumb: below 1 is below par, 1 or higher is good, 2 and up is very good, and 3+ is excellent. In the illustrative example the portfolio scores 0.79, which falls in the "below par" band. Treat these thresholds as practical guidelines rather than hard law: the Sharpe ratio depends on the measurement window, the asset class and the risk-free benchmark you pick, so always compare portfolios using the same set of assumptions.
What is the formula for the Sharpe ratio?
Sharpe = (portfolio return − risk-free rate) / standard deviation, written (Rp − Rf) / σ. All three quantities must share the same units (usually %/year), so the result is dimensionless. The Rp − Rf part is the excess return. Example: (14% − 4.5%) / 12% = 9.50 / 12 = 0.79. That is exactly the calculation the tool above performs.
What risk-free rate should I use in Vietnam?
There is no single right number, but a sensible benchmark is the government bond yield for a matching maturity, or a long-term savings rate at a major bank — the near-zero-risk return you give up by investing in equities instead. This page uses an illustrative 4.5%/year. Swap in a rate that matches your portfolio's horizon; the higher the risk-free rate, the lower the Sharpe ratio for the same portfolio.
Why can a higher-returning portfolio have a lower Sharpe ratio?
Because the Sharpe ratio penalises risk. In the example, Portfolio B returns 20% (more than A's 14%) but its standard deviation is 28% versus A's 12%, so B's Sharpe is only 0.55, below A's 0.79. The extra return does not compensate for the much larger swings. This is why you should never pick a portfolio on headline return alone — you have to weigh the risk that comes with it.
What are the limitations of the Sharpe ratio?
A few matter. First, it penalises all volatility equally, including the upside swings you want — which is why many investors use the Sortino ratio, which penalises only downside deviation. Second, it assumes returns are roughly normal and ignores tail risk (rare but severe crashes). Third, the result is sensitive to the time window and the risk-free benchmark you choose. Use the Sharpe ratio as one complementary measure alongside other risk metrics, not on its own.