Sharpe ratio
Measures risk-adjusted return: the excess return earned per unit of volatility.
Two investments with the same return are not equally good if one swung twice as hard to get there. The Sharpe ratio divides the return above a risk-free rate by the volatility that came with it, so strategies of different riskiness can be compared on one scale.
Formula
Sharpe = (Return − Risk-free rate) ÷ Volatility
Inputs
- Return. Average return over the period, annualized.
- Risk-free rate. What cash would have paid over the same period.
- Volatility. Standard deviation of returns, annualized.
How to read it
Higher is better. Above 1 is generally considered good for a diversified portfolio; below 0 means the return did not beat cash. Only compare ratios measured over the same period.
How to use it
Compare strategies, funds or portfolios measured over the same period: the higher Sharpe earned more per unit of risk taken.
Limitations
Treats upside and downside swings alike, assumes returns are roughly normal, and is unstable over short windows — a year of daily data gives a wide margin of error.
In Kereon
Portfolio. Daily returns of today's weights held constant back through the holdings' price history (each day averaging the holdings that traded that day), less the daily share of the risk-free rate set on the page (4% unless you change it). Mean ÷ sample standard deviation × √252. The Rolling Sharpe chart does not subtract the risk-free rate — it shows the shape, and this is the figure that is quoted.
Strategies. The backtest's daily return above the 13-week U.S. Treasury bill's rate that day (the bill's rate spread over 252 trading days): mean ÷ sample standard deviation × √252. A strategy sitting in cash scores about zero, not a free positive number.
Investing · price record. The symbol's daily close-to-close returns: mean ÷ sample standard deviation × √252, risk-free rate 0. Over the whole price history loaded, unless the label names a window (1y = the last 252 sessions, 6m = 126).
Charts · Compare. Each series' mean daily return × 252 ÷ its annualized volatility over the chosen window, with a risk-free rate of 0.
Charts · Superchart. A rolling Sharpe over the last 60 bars: the mean one-bar return ÷ its sample standard deviation, annualized by the measured number of bars in a year, with a risk-free rate of 0.
Also called: sharpe, sharpe ratio, rolling sharpe, sharpe / benchmark sharpe.