Sharpe ratio
The Sharpe ratio measures how much return a portfolio earned per unit of volatility. It first subtracts the risk-free rate, then divides what is left by volatility. Values above 1 are considered good; below 0, the risk taken did not pay off in arithmetic terms. It looks backwards and predicts nothing.
- Below zero
- Return over the period fell short of the risk-free rate. Across short windows that contain a correction this is not unusual, and it says little about the quality of the portfolio.
- Unremarkable
- Return and volatility roughly balance out. This is where most broadly diversified portfolios land over long periods.
- Considered good
- Noticeably more return than volatility. The "above 1" threshold comes from fund rating practice and is a convention, not a target.
- Considered very good
- Rare over long periods. Values this high usually hold for a few years at most, or the window is too short to support the reading.
How it is calculated
Sharpe = ( R[portfolio] − R[risk-free] ) / σ[portfolio]
An example with unspectacular numbers: a portfolio returned 7.2 % per year over five years, the short-term money market rate was 2.4 %, and volatility was 12.8 %.
- Return p.a.
- 7.2 %
- Risk-free
- 2.4 %
- Volatility p.a.
- 12.8 %
- Sharpe
- 0.38
What the number does not tell you
- It penalises upside swings exactly like downside swings. A portfolio with many strong winning months gets a worse Sharpe ratio for it, even though nobody minds that kind of volatility.
- It assumes normally distributed returns. Real markets produce more extreme days than a bell curve expects. For portfolios with pronounced tails, the Sharpe ratio reads too kindly.
- It depends on the risk-free rate. The same 7.2 % return yields a Sharpe of 0.52 at a 0.5 % money market rate and only 0.25 at 4 %, without anything changing in the portfolio itself.
- Short periods are noise. Below roughly three years the value moves so much that it describes the period rather than the portfolio.
Related metrics
How Evergrova calculates it
On the Performance & Risk page, your portfolio Sharpe ratio sits in the metric band alongside Sortino, volatility and max drawdown over the same period.
Data basis: daily returns over the selected window, annualised with 252 trading days; risk-free rate = short-term money market rate.
View the demo portfolioCommon questions
What is a good Sharpe ratio?
By convention: above 1 is good, above 2 very good. Those thresholds come from fund rating practice and are not targets. A broadly diversified equity portfolio usually sits between 0.3 and 0.6 over long periods. Values above 2 rarely last more than a few years.
Why is my Sharpe ratio negative?
Because return over the period fell short of the risk-free rate. For windows containing a correction this is normal. Check the same value over a longer period before drawing conclusions from it.
Sharpe or Sortino, which one counts?
Both measure the same ratio with a different definition of risk. Sharpe counts every swing, Sortino only the downside. When the two diverge widely, the portfolio had many strong upside months.
Last reviewed: 2026-08-08