Sharpe Ratio Calculator
Measure risk-adjusted returns by comparing portfolio excess returns to their volatility.
10 data points parsed
Formula
R_p is the portfolio return, R_f is the risk-free rate, and σ_p is the standard deviation of portfolio returns. Higher values indicate better risk-adjusted performance.
Daily Sharpe is scaled by √252 (trading days per year) to annualize. This assumes returns are independently and identically distributed.
Sample standard deviation of returns, measuring the dispersion of returns around the mean. Higher σ means more volatile returns.
Examples
- Daily returns: 0.02, -0.01, 0.03, 0.015, -0.005, 0.025, 0.01
- Mean daily return = 0.01357 (1.36%)
- Std deviation = 0.01397
- Risk-free rate = 5% annual → 0.0198% daily
- Daily Sharpe = (0.01357 − 0.000198) / 0.01397 = 0.957
- Annualized Sharpe = 0.957 × √252 = 15.19
- Daily returns: 0.005, -0.008, 0.012, -0.003, 0.007, -0.002, 0.004
- Mean daily return = 0.00214 (0.21%)
- Std deviation = 0.00647
- Risk-free rate = 5% annual → 0.0198% daily
- Daily Sharpe = (0.00214 − 0.000198) / 0.00647 = 0.300
- Annualized Sharpe = 0.300 × √252 = 4.76
- Daily returns: 0.05, -0.06, 0.04, -0.07, 0.03, -0.05, 0.02
- Mean daily return = −0.00429 (−0.43%)
- Std deviation = 0.0479
- Risk-free rate = 5% annual → 0.0198% daily
- Daily Sharpe = (−0.00429 − 0.000198) / 0.0479 = −0.094
- Annualized Sharpe = −0.094 × √252 = −1.49
Key Concepts
What is the Sharpe Ratio?
The Sharpe ratio measures how much excess return you earn per unit of risk (volatility). A ratio of 1.0 means you earn one unit of return for each unit of risk. Higher is better — it means more return for the same amount of risk, or the same return with less risk.
Interpreting Sharpe Values
In traditional finance, a Sharpe above 1.0 is considered good, above 2.0 is very good, and above 3.0 is excellent. In crypto, where volatility is much higher, even strategies with Sharpe ratios of 0.5–1.0 can be considered reasonable, while anything above 2.0 is exceptional.
Why Use the Risk-Free Rate?
The risk-free rate represents the return you could earn with zero risk (e.g., Treasury bills). The Sharpe ratio subtracts this because you should only be compensated for risk above what you'd earn risk-free. If a strategy can't beat the risk-free rate, its Sharpe will be negative.
Daily vs Annualized Sharpe
Daily Sharpe ratios are typically very small numbers. Multiplying by √252 annualizes the metric, making it comparable to industry standards. The √252 factor comes from the assumption that daily returns are independent — variance scales linearly with time, so standard deviation scales with the square root.
Limitations of Sharpe Ratio
The Sharpe ratio assumes returns are normally distributed, which crypto returns are not — they have fat tails and skewness. It also penalizes upside volatility the same as downside volatility. The Sortino ratio addresses this by only penalizing downside deviation.
Sharpe Ratio in Portfolio Construction
When comparing two strategies, the one with the higher Sharpe ratio delivers better risk-adjusted returns. Combining uncorrelated strategies can increase the portfolio's overall Sharpe ratio even if individual strategies have modest Sharpes — diversification improves risk-adjusted performance.
How to Calculate and Interpret the Sharpe Ratio
The Sharpe ratio is the most widely used metric for evaluating risk-adjusted performance. It answers a simple question: how much return are you earning for the risk you're taking? A strategy that returns 20% annually with 40% volatility (Sharpe ~0.5) may be less attractive than one returning 10% with 5% volatility (Sharpe ~2.0).
To calculate the Sharpe ratio, you need a series of periodic returns (daily, weekly, or monthly), a risk-free rate, and the standard deviation of those returns. The formula divides the average excess return (above the risk-free rate) by the standard deviation, giving a single number that captures the risk-return tradeoff.
For crypto traders, the Sharpe ratio is especially valuable because it normalizes performance across strategies with wildly different volatility profiles. A market-making bot with steady small gains may have a higher Sharpe than a directional strategy that occasionally hits big winners but suffers large drawdowns.
Frequently Asked Questions
What's a good Sharpe ratio for crypto trading?
In crypto, a Sharpe ratio above 1.0 is considered good, above 2.0 is very good, and above 3.0 is exceptional. Due to crypto's higher volatility compared to traditional markets, many profitable crypto strategies operate in the 0.5–1.5 range. Market-neutral strategies tend to have higher Sharpes than directional ones.
Should I use daily or monthly returns?
Daily returns give more data points and a more precise estimate, but can be noisy for strategies with infrequent trades. Monthly returns are smoother but require many months of data to be statistically meaningful. For active crypto trading, daily returns are standard. This calculator assumes daily returns and annualizes with √252.
Why is my Sharpe ratio negative?
A negative Sharpe ratio means your strategy's average return is below the risk-free rate. This can happen during drawdown periods, with a poor strategy, or when the risk-free rate is high relative to your returns. A negative Sharpe doesn't necessarily mean losses — just that you'd be better off in risk-free assets.
How many data points do I need?
At minimum, 30 daily returns are recommended for a meaningful Sharpe ratio. For statistical confidence, 60–90+ data points are better. With fewer than 20 observations, the standard deviation estimate is unreliable and the Sharpe ratio can be misleading.