(Rp - Rf) / σp where Rp = portfolio return, Rf = risk-free rate, σp = standard deviation of returns
The Sharpe ratio measures return earned per unit of volatility.
What it is
The Sharpe Ratio, developed by Nobel laureate William Sharpe, measures risk-adjusted return. It takes the return earned above a safe, risk-free benchmark (like a Treasury bill) and divides it by how volatile those returns were. The result tells you how efficiently an investment converts risk into reward.
Why it matters
It lets you compare investments on a level playing field, since a high return achieved with wild swings may be worse than a steadier, lower return. Pitfalls: it assumes returns are roughly bell-shaped and penalizes upside volatility the same as downside, so it can flatter strategies that are calm until they blow up.
How it's calculated
Subtract the risk-free rate from the investment's return to get the excess return, then divide that by the standard deviation (volatility) of the investment's returns.
How Quintarthai uses it
Risk and volatility metrics are available across the screener and company pages, where you can compare names on a risk-adjusted basis; start on the app.
Cross-border note. Choose the risk-free rate to match the holding's currency: US 3-month T-bills for USD-denominated returns and Government of Canada T-bills for CAD, otherwise the excess-return figure is distorted by the currency mismatch.
FAQ
What counts as a good Sharpe Ratio?
As a rough guide, below 1 is considered weak, above 1 is acceptable, above 2 is strong, and above 3 is exceptional. Context and the comparison period matter.
Why subtract the risk-free rate?
Because you could earn that rate with virtually no risk, so only the return above it is genuine reward for taking on risk. The ratio measures that excess per unit of volatility.
Check your understanding
Fund A returns 12% with high volatility; Fund B returns 9% with much lower volatility, and Fund B has the higher Sharpe Ratio. What does that tell you?
The Sharpe Ratio divides excess return by volatility, so a higher ratio means more reward per unit of risk, even when the raw return is lower.