What does Sharpe ratio measure?
✅ Higher = more return per unit of volatility
Relates the return above the risk-free rate to the volatility. A higher value means more extra return per unit of volatility.
Background: William F. Sharpe, Nobel Prize in Economics 1990.
How is Sharpe ratio calculated?
(Rₚ − Rᶠ) / σₚ
Rₚ = average daily return × 252 (not the CAGR) · σₚ = volatility · Rᶠ = risk-free rate from your settings (0 in the Community-Backtests)
How are values of Sharpe ratio usually read?
- < 0.5
- low
- 0.5 – 1.0
- medium
- 1.0 – 2.0
- high
- > 2.0
- very high (rarely lasting)
Rules of thumb — where a value lands depends on asset class, period and market phase. A classification is no recommendation.
Worked example with real prices
Three securities from the test data, four allocations, calculated in the portfolio backtester over the same period:
| World equities | Euro government bonds | Gold | CAGR | Volatility | Sharpe ratio |
|---|---|---|---|---|---|
| 100 % | 0 % | 0 % | 12.69 % | 15.30 % | 0.73 |
| 60 % | 40 % | 0 % | 8.37 % | 9.45 % | 0.69 |
| 40 % | 40 % | 20 % | 7.99 % | 7.51 % | 0.80 |
| 0 % | 100 % | 0 % | 1.59 % | 5.05 % | -0.06 |
Rₚ in the formula is the annualised average daily return, not the CAGR — which is why (CAGR − 2 %) ÷ volatility does not give exactly the Sharpe ratio in the table.
Prices from 13 Nov 2009 to 7 Oct 2026 in euros, starting capital €10,000, annual rebalancing, without order fees and taxes; Sharpe ratio with a risk-free rate of 2 %. Past results are no indication of future ones.
All three securities are in the test data — you can recalculate the example yourself on the free plan.
When is Sharpe ratio useful?
When you want to compare portfolios with different levels of volatility.
What are the limits of Sharpe ratio?
Only compare values with the same period and the same assumptions, especially the same risk-free rate. Volatility captures rare, severe crashes only partly, so a strategy with rare large losses can still show a high value.
Where do you see Sharpe ratio for your own securities?
In the portfolio backtester, Sharpe ratio appears for every calculated allocation of your securities. The Watchlist shows it for each individual security.
Last updated: 30 Oct 2026