What is Sharpe Ratio?
A measure of return earned per unit of risk (volatility) taken.
Educational — not investment advice
The Sharpe ratio divides an investment’s excess return (return above a risk-free rate) by its volatility. It answers: "how much return am I getting for the bumpiness I’m enduring?"
A higher Sharpe ratio means more reward for the same amount of risk. It is a standard way to compare strategies or portfolios on a risk-adjusted basis rather than raw return alone.
The trap most people miss
Sharpe treats all volatility as bad, including upside swings, and it assumes returns are well-behaved. Strategies that sell insurance-like risk can post a lovely Sharpe for years and then blow up — the ratio never saw the tail coming.
Frequently asked about Sharpe Ratio
What is a good Sharpe ratio?
Loosely, above 1 is considered decent and above 2 very good — but the number is only meaningful compared against similar strategies over the same period.
Why subtract a risk-free rate?
Because you could have earned that rate with no risk. Sharpe measures the reward for the risk you actually took on top of it.
Related terms
Guides that use Sharpe Ratio
See your own portfolio’s Sharpe ratio
Add what you hold and Tradune computes a Sharpe ratio on your time-weighted returns once there is enough history (annualized after a full year), next to volatility and max drawdown.
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This definition is for educational purposes only and is not investment, tax, or financial advice. Concepts are explained in general terms; how they apply to your situation can differ. Always do your own research.