Glossary · Investing and personal finance
Sharpe ratio
The Sharpe ratio measures return per unit of risk: the extra return over safe cash, divided by how much the investment swings.
Also called: reward-to-variability ratio, risk-adjusted return
S&P 500 with dividends against Treasury bills, monthly data to Oct 2026.
Same period.
Rebalanced every January.
In plain words
Two friends each made 10% last year. One kept her money in a steady fund; the other rode a rollercoaster that was down 30% at one point. Same return, very different risk. The Sharpe ratio puts that difference into one number.
It takes the return above what safe cash (Treasury bills) paid, and divides it by the volatility, the size of the swings. A higher number means more reward for every unit of bumpiness. The economist William Sharpe proposed it in 1966; he later shared the 1990 Nobel prize in economics.
Since 1934, US stocks had a Sharpe ratio of about 0.62, 10-year Treasury bonds about 0.24, and a 60/40 mix of the two about 0.68.
Example
Fund A or fund B?
Treasury bills pay 4% a year.
- Fund A returns 9% a year with a volatility of 10%: (9% − 4%) ÷ 10% = 0.5.
- Fund B returns 12% a year with a volatility of 20%: (12% − 4%) ÷ 20% = 0.4.
- B earns more, but A earns more per unit of risk.
- Borrow at the bill rate to hold twice as much of A and you match B’s risk: 4% + 2 × 5% = 14% a year, more than B.
A higher Sharpe ratio means a better reward for the risk taken; on its own it does not say which fund ends with more money.
One level deeper
The formula: Sharpe ratio = (return − risk-free rate) ÷ standard deviation of returns, usually in yearly terms. Over long periods, broad stock markets come in well below 1. Since 1934, US stocks beat Treasury bills by about 8.0% a year, with a volatility of about 13%.
It has blind spots. It treats rises and falls alike, while investors only mind the falls (the Sortino ratio counts only the downside). It assumes returns are roughly bell-shaped, so strategies that earn small steady gains and then crash, like selling insurance, can look great until they blow up. And it is flattered by smoothed prices: assets that are rarely priced look calmer than they are.
It changes a lot over time. Over 10-year windows since 1944, the Sharpe ratio of US stocks ranged from −0.40 (to Mar 2009) to 1.79 (to Jun 1959).
The Sharpe ratio of US stocks over every 10-year stretch
Each point uses the 10 years of monthly returns ending that month. Below zero, stocks did worse than Treasury bills over the decade, as in 10% of these windows.
The numbers behind the chart
| Date | 10-year Sharpe ratio |
|---|---|
| Jan 1944 | 0.45 |
| Dec 1950 | 0.99 |
| Dec 1960 | 1.35 |
| Dec 1970 | 0.37 |
| Dec 1980 | 0.17 |
| Dec 1990 | 0.42 |
| Dec 2000 | 1.20 |
| Dec 2010 | 0.01 |
| Dec 2020 | 1.15 |
| Dec 2022 | 1.04 |
| Dec 2023 | 0.92 |
| Dec 2024 | 0.98 |
| Dec 2025 | 1.02 |
| Oct 2026 | 1.07 |
Why it matters
It puts investments with different risks on one scale: a calm fund and a wild one.
It is the standard yardstick for fund managers and strategies, though an easy one to game.
It shows why diversification helps: a mix can have a higher Sharpe ratio than its parts.
A common mistake
Myth: The investment with the highest return is the best one.
In fact: Not if it took far more risk to get there. Two funds with the same return can have very different Sharpe ratios, and a high-return fund with a low ratio can lose much more in a bad year.
Questions people ask
What is a good Sharpe ratio?
Over long periods, broad stock markets usually come in somewhere around 0.3 to 0.6, and above 1 is excellent. Since 1934, US stocks came in at about 0.62 on our monthly data. Short periods can show very high numbers that do not last.
How do you calculate the Sharpe ratio?
Take the average return, subtract the return of a risk-free asset like Treasury bills, and divide by the standard deviation of the returns. With monthly data, multiply the monthly ratio by the square root of 12 to get a yearly figure.
What is the difference between the Sharpe and Sortino ratios?
The Sharpe ratio divides by all of the swings, up and down. The Sortino ratio divides only by the downside swings, so an investment is not penalized for jumping up.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US 10-year Treasury bonds, total return index: Robert J. Shiller, Online Data (shillerdata.com), ie_data.xls, sheet "Data": "Long Interest Rate GS10", checked against "Monthly Total Bond Returns" and "Real Total Bond Returns".
- 3-month Treasury bill, secondary market rate: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series TB3MS; retrieved from FRED, Federal Reserve Bank of St. Louis.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- Excess returns are the S&P 500’s monthly total return minus one month of the 3-month Treasury bill rate; the yearly ratio is the monthly mean ÷ the monthly standard deviation × √12.
- This page explains a term. It is not investment advice.