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Sharpe Ratio & Risk-Adjusted Return Screener Formula Breakdown
Annualized expected or historical compound return of the asset.
Benchmark return on riskless US government Treasury bills (typically 4.0% - 4.5%).
Net return generated above cash treasuries: R_p minus R_f.
Standard deviation of returns, measuring asset price fluctuation and risk.
How to Calculate Sharpe Ratio Calculator Step-by-Step
Determine expected annual return (using CAPM, consensus estimates, or multi-year historical returns).
Retrieve current risk-free rate from 10-year US Treasury benchmarks.
Calculate annualized price volatility (standard deviation of returns).
Subtract risk-free rate from expected return to calculate excess return.
Divide excess return by volatility to establish the Sharpe Ratio and assign an institutional rating tier.
How to Interpret the Result
Frequently Asked Questions
What is a good Sharpe Ratio?
In finance, a Sharpe Ratio of 1.0 to 1.99 is considered good, 2.0 to 2.99 is very good, and 3.0 or higher is exceptional. Scores below 1.0 indicate sub-optimal risk-reward efficiency.
Who invented the Sharpe Ratio?
Nobel laureate William F. Sharpe introduced the metric in 1966 to help investors understand whether a portfolio's outperformance is due to skilled decision-making or reckless risk-taking.
What does a negative Sharpe Ratio mean?
A negative Sharpe Ratio means the asset generated returns lower than risk-free government bonds, indicating an investor would have earned more money with zero risk by holding Treasury bills.
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