Excess return per unit of volatility
The Sharpe ratio divides expected excess return, or historical mean excess return, by the standard deviation of portfolio returns. Enter a portfolio return, risk-free rate, and volatility measured over the same interval: annual with annual, or monthly with monthly. CAPM estimates a required return from beta. Real return strips inflation from a nominal rate.
Sharpe ratio = excess return ÷ standard deviation of portfolio returns
Example
A 12% mean return, 4% mean risk-free rate, and 15% return volatility has an 8% excess return and a Sharpe ratio of 0.533. An 18% return, 3% risk-free rate, and 12% volatility produces 1.25. The same 12% and 4% with 8% volatility produces 1.0.
What this ratio leaves out
Volatility must be positive. This page does not estimate means or standard deviation from a return series and does not annualize the inputs. Multiplying a monthly Sharpe ratio by √12 is valid only under restrictive assumptions. Downside-only Sortino and benchmark-relative information ratios stay outside the three numbers you enter. A return below the risk-free rate produces a negative Sharpe ratio.