Sharpe

Sharpe Ratio Explained

The most widely used measure of risk-adjusted return

Formula

(Rp − Rf) / σp

where Rp is portfolio return, Rf is the risk-free rate, and σp is the standard deviation of portfolio returns.

What is the Sharpe Ratio?

The Sharpe Ratio measures how much excess return you earn per unit of total risk (volatility). It was developed by Nobel laureate William F. Sharpe and remains the standard benchmark for evaluating whether a portfolio's returns justify the risk taken to achieve them. A higher Sharpe Ratio means you're being compensated better for the volatility you're absorbing.

How to interpret it

A Sharpe Ratio above 1.0 is generally considered good — you're earning more than one unit of return for each unit of risk. Below 0 means the portfolio is underperforming the risk-free rate. Most retail portfolios fall between 0.3 and 1.2 over a full market cycle. The ratio is most meaningful when compared to a benchmark or peer group rather than viewed in isolation.

What counts as a good Sharpe?

< 0Underperforming risk-free assets — returns don't justify the risk taken

0 – 0.5Below average — consider whether concentration or timing is the cause

0.5 – 1.0Acceptable — solid for a diversified equity portfolio

1.0 – 2.0Good — strong risk-adjusted performance

> 2.0Exceptional — rare outside managed funds; verify data quality

What affects your Sharpe?

Asset allocation — highly volatile assets drag the ratio down
Diversification — uncorrelated holdings reduce σp without reducing return
Market regime — the ratio fluctuates significantly across bull and bear markets
Time horizon — shorter windows produce noisier, less reliable readings
Risk-free rate — rising interest rates reduce the numerator

How Portivex uses Sharpe

Portivex calculates your Sharpe Ratio using daily portfolio returns over your full holding history, benchmarked against the current 3-month gilt yield as the risk-free rate. The confidence tier (Low / Medium / High) reflects how many trading days of data your ratio is based on — readings under 60 days are flagged as Limited. Your investor profile (Conservative / Balanced / Growth) adjusts what counts as a 'Good' Sharpe so the signal is relevant to your actual strategy.

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Frequently asked questions

What is a good Sharpe Ratio for a retail investor?

Most financial advisors consider 1.0 or above to be good for a retail portfolio. However, context matters — a 0.7 Sharpe on a conservative, bond-heavy portfolio is more impressive than a 1.2 on a highly leveraged one. Always compare against your own benchmark and risk profile.

Why does my Sharpe Ratio look different on different platforms?

Different platforms use different annualisation methods, risk-free rates, and return calculation windows. Some use monthly returns; others use daily. Portivex uses daily returns with a dynamic risk-free rate, which is more accurate for short-to-medium holding periods.

Can the Sharpe Ratio be negative?

Yes. A negative Sharpe Ratio means your portfolio returned less than the risk-free rate during that period — you would have been better off in cash or gilts. This is common in bear markets and doesn't necessarily indicate a flawed strategy, but it should prompt a review.

Related metrics

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Add your holdings and Portivex calculates your Sharpe — with confidence context and plain-English interpretation tailored to your investor profile.

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