What is a good Sharpe ratio?

Roughly, above ~1 is often considered good and above ~2 excellent — but a diversified long-term portfolio commonly sits around 0.3–0.6. Compare portfolios over the same period rather than chasing an absolute number.

What's the difference between the Sharpe and Sortino ratios?

Sharpe divides excess return by total volatility (up and down); Sortino divides it by downside volatility only. Sortino better reflects the risk most investors care about — losing money.

Can the Sharpe ratio be negative?

Yes — if a portfolio returns less than the risk-free rate, its Sharpe is negative, meaning you weren't compensated for the risk you took.

The Sharpe Ratio, Explained: Are You Being Paid for the Risk You Take?

5 min read · Updated 2026-06-15

The Sharpe ratio answers a question raw returns can't: are you actually being paid for the risk you're taking? It measures how much return a portfolio earned above a risk-free rate, per unit of the risk (volatility) it took on.

It's the standard way to compare two portfolios fairly — because a higher return achieved by taking wildly more risk isn't necessarily better.

See your portfolio's Sharpe ratio →

The formula, in plain English

Sharpe ratio = (your return − the risk-free rate) ÷ your volatility. The risk-free rate is roughly what you'd earn in something like short-term Treasury bills. So it's “extra return above safe cash, divided by how bumpy the ride was.” A higher Sharpe means more reward for each unit of risk.

What counts as a good Sharpe ratio

As a rough guide, a Sharpe above ~1 is often considered good and above ~2 excellent — but context matters enormously. A long-run, diversified buy-and-hold portfolio often sits lower (around 0.3–0.6), so don't panic if yours isn't above 1. The real value is comparing like with like: two portfolios over the same period.

Rough Sharpe-ratio interpretation over long periods
Sharpe (long run)	Rough read
Below 0	You'd have done better in T-bills
0 – 0.3	Weak compensation for the risk taken
0.3 – 0.6	Typical for diversified buy-and-hold
0.6 – 1.0	Strong risk-adjusted performance
Above 1.0	Excellent — rare over long periods

Rules of thumb only — always compare portfolios over the same period, not against an absolute number.

Its blind spots

The Sharpe ratio has real limitations worth knowing:

•It treats all volatility as bad — including big upside swings, which most investors are happy to have.
•It assumes returns are roughly normally distributed, so it understates the risk of strategies prone to rare, large crashes.
•It's easy to game over short windows or with leverage.

The Sortino ratio: a useful cousin

Because penalizing upside is odd, many investors also look at the Sortino ratio, which is like the Sharpe but only counts downside volatility. It answers “am I being paid for the risk of losing money,” which is often what you actually care about. Looking at both gives a fuller picture.

How to see yours

Backtest your portfolio and it will report the Sharpe (and Sortino) alongside return and drawdown, using a risk-free rate from real Treasury yields — so you can compare your mix against a benchmark on a level, risk-adjusted basis.

Try it yourself

Backtest PortfolioSee your portfolio's Sharpe and Sortino on real data.Open tool →Portfolio OptimizationFind the maximum-Sharpe mix for your assets.Open tool →Efficient FrontierVisualize the best risk-adjusted portfolios.Open tool →

FAQ

What is a good Sharpe ratio?: Roughly, above ~1 is often considered good and above ~2 excellent — but a diversified long-term portfolio commonly sits around 0.3–0.6. Compare portfolios over the same period rather than chasing an absolute number.
What's the difference between the Sharpe and Sortino ratios?: Sharpe divides excess return by total volatility (up and down); Sortino divides it by downside volatility only. Sortino better reflects the risk most investors care about — losing money.
Can the Sharpe ratio be negative?: Yes — if a portfolio returns less than the risk-free rate, its Sharpe is negative, meaning you weren't compensated for the risk you took.

Key terms in this guide

Plain-English definitions in the Learning Hub.

Sharpe ratio →Sortino ratio →Volatility (annualized standard deviation) →Downside deviation →

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