The Sharpe ratio answers one question: how much return did this portfolio produce for each unit of risk it took on?
Two portfolios can post the same annual return while behaving completely differently along the way. One drifts upwards steadily. The other doubles, halves, and doubles again. The Sharpe ratio separates them, because it divides the return by how much the portfolio moved to get there.
How it is calculated
Sharpe ratio = (mean daily return − daily risk-free rate) / standard deviation of daily returns × √252
The risk-free rate is subtracted first because a return you could have had without taking any risk is not compensation for taking risk. The result is divided by volatility and annualised with √252.
The risk-free rate is an assumption
Gylder uses a fixed 3% annual risk-free rate. It is a configuration constant chosen to sit roughly in the euro short-rate environment. It is not pulled from a live market feed and it does not change with the window you select.
This matters twice over. A Sharpe ratio quoted elsewhere was probably computed against a different assumption, so the two are not directly comparable. And when your returns sit close to 3%, the choice of rate drives a large share of the result.
How to read it
Higher means more return per unit of volatility. That is the whole interpretation.
Gylder does not label a Sharpe ratio as good or bad, and does not compare yours to a threshold. What counts as reasonable depends on the asset class, the period, and what you were trying to do. The comparison that does hold is against yourself, over the same length of period.
What it misses
- Upside is punished too. All volatility counts as risk, including the favourable kind. That is the gap the Sortino ratio closes by using only downside deviation.
- Period sensitivity. The same portfolio over one year and over five produces different figures. Comparing the two is not like-for-like.
- Thin trading. Concentrated or rarely traded holdings produce a figure that looks steadier than the position actually is.
In practice
The Sharpe ratio sits on the Performance tab of the investments dashboard, next to Sortino, precisely because the two complement each other. Change the date range and every measure in the grid recalculates.
Related terms
- Volatility: the denominator under this ratio
- Portfolio: how composition drives risk
- Diversification: spreading as a dampener
Want to understand where the return in the numerator comes from? Read Calculating your portfolio's real return.