1. What is the Sharpe Ratio?

The Sharpe Ratio measures risk-adjusted return of an investment or portfolio. It helps investors understand the return of an investment compared to its risk, with higher ratios indicating better risk-adjusted performance.

2. How Does the Calculator Work?

The calculator uses the Sharpe Ratio formula:

Where:

• \( Return \) — Investment return (%)
• \( Risk\_Free\ Rate \) — Risk-free rate (%)
• \( Standard\ Deviation \) — Volatility of returns (%)

Explanation: The ratio shows how much excess return you receive for the extra volatility you endure for holding a riskier asset.

3. Importance of Sharpe Ratio

Details: The Sharpe Ratio is crucial for comparing investment performance, constructing portfolios, and evaluating risk-adjusted returns across different asset classes.

4. Using the Calculator

Tips: Enter return and risk-free rate as percentages (e.g., 8 for 8%). Standard deviation must be greater than 0.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Sharpe Ratio?
A: Generally, a ratio of 1 or higher is considered good, 2 or higher is very good, and 3 or higher is excellent.

Q2: What risk-free rate should I use?
A: Typically use 3-month T-bill rate for short-term investments or 10-year Treasury yield for long-term investments.

Q3: Can Sharpe Ratio be negative?
A: Yes, when returns are below the risk-free rate, indicating the investment underperformed the risk-free benchmark.

Q4: What are limitations of Sharpe Ratio?
A: It assumes normal distribution of returns and that volatility equals risk, which may not always be true.

Q5: How often should I calculate Sharpe Ratio?
A: Regular calculation (monthly/quarterly) helps track performance consistency over time.