What is the Sharpe Ratio?
The Sharpe Ratio measures risk-adjusted return: how much return you earn above the risk-free rate per unit of total volatility. Higher is better. It was introduced by William Sharpe in 1966 and is the most widely used risk-adjusted metric.
How We Compute It
Sharpe = (Mean daily excess × 252) / (StdDev of fund daily returns × √252)
Risk-free rate: 6% annualized (approximate India T-bill rate), which gives ~0.0238% daily. We use sample std dev (DuckDB's STDDEV function, divides by n-1).
Worked Example
Sharpe calculation
Mean daily fund return: 0.055% (~13.9% annualized)
Risk-free daily: 0.024% (6% / 252)
StdDev of daily returns: 0.95%
Sharpe = (0.055 − 0.024) × 252 / (0.95 × √252)
= 7.812 / 15.07 = 0.52
How to Interpret
- Sharpe ≥ 1.0: Excellent risk-adjusted returns (shown in green)
- Sharpe 0.5-1.0: Good
- Sharpe 0-0.5: Positive but the return barely compensates for volatility
- Sharpe < 0: The fund didn't even beat the risk-free rate (shown in red)
Edge Cases & Differences
- Risk-free rate choice: We use 6% p.a. (India context). Using a different rate changes the Sharpe. Some providers use the 91-day T-bill rate which fluctuates. Our fixed 6% gives a stable, comparable baseline.
- Penalizes all volatility equally: Sharpe penalizes upside volatility just as much as downside. A fund that jumps 5% up one day gets the same penalty as one that drops 5%. If this bothers you, look at Sortino instead.
- Annualization: We annualize both numerator and denominator from daily data. Some providers compute from monthly returns (multiply by √12). The numbers won't match exactly due to the different return frequencies.
Related metrics
More Risk Metrics methodology from the MFPRO analytics tool: