# What Is the Sharpe Ratio? Definition and Example

> The Sharpe ratio tells you how much return you earned for each unit of volatility. Here is the formula, what counts as a good number, and what the S&P 500’s has been.

Source: https://www.exent.ai/learn/sharpe-ratio · Reviewed by David, Senior Analyst, Exent · Published Nov 9, 2026 · Updated Nov 9, 2026

## Key takeaways

- The Sharpe ratio is return above the risk‑free rate divided by volatility. Common rule of thumb: below 1 is ordinary, 1–2 is good, above 2 is rare. The S&P 500’s was 0.86 over the 10 years to Sep 30, 2026.
- Over 1928–2023, the S&P 500’s long‑run Sharpe ratio was about 0.4–0.5 on annual data, so a portfolio near 1 for a decade is unusually efficient.
- Only 74 of 470 large US stocks beat the S&P 500’s 5‑year Sharpe ratio in Exent’s data.
- Always compare Sharpe ratios over the same period. One great year can make any number look good.

## What is the Sharpe ratio?

The Sharpe ratio measures return per unit of risk. It takes what a portfolio earned above cash and divides it by how much the portfolio swung. A higher number means you were paid more for the ups and downs you lived through. It is one of the core ways to judge risk‑adjusted return.

**Sharpe ratio = (portfolio return − risk‑free rate) ÷ standard deviation of returns**

## What is a good Sharpe ratio for my portfolio?

A Sharpe ratio near or above the S&P 500 index’s over the same period is a sensible bar. The bands below are a common convention, not an official standard.

| Sharpe ratio | Common reading |
| --- | --- |
| Below 0 | Did worse than cash |
| 0 to 1 | Ordinary; most stocks and funds sit here over long periods |
| 1 to 2 | Good, especially if it lasts 5+ years |
| Above 2 | Rare outside short windows; check the period |

## What has the S&P 500’s Sharpe ratio been historically?

It moves a lot with the window. In Exent’s data, as of Sep 30, 2026, SPY’s Sharpe ratio was:

| Window to Sep 30, 2026 | SPY Sharpe ratio | SPY volatility |
| --- | --- | --- |
| 1 year | 0.97 | 13.3% |
| 3 years | 1.40 | 12.5% |
| 5 years (includes 2022) | 0.69 | 15.7% |
| 10 years | 0.86 | 15.3% |

Over a much longer span the number is lower. Using [Aswath Damodaran’s NYU Stern data](https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histret.html) on annual S&P 500 total returns and T‑bill rates, the Sharpe ratio works out to about 0.42 for 1928–2023 and 0.49 for 1950–2023.

## Why it matters for a self‑directed investor

Raw return hides how much risk you took. Two portfolios can both return 12% a year while one falls twice as far in a crash. The Sharpe ratio puts them on the same scale. Compare yours with a  [risk‑matched benchmark](https://www.exent.ai/learn/risk-matched-benchmark) to see whether your picks earned their risk. For ways to lift it, see [how to improve your Sharpe ratio](https://www.exent.ai/resources/improve-sharpe-ratio).

## Common mistakes

- Comparing a 1‑year Sharpe ratio with a 10‑year one.
- Ignoring that it punishes upside swings as much as losses. The [Sortino ratio](https://www.exent.ai/learn/sortino-ratio) fixes that.
- Trusting it for assets with rare, large crashes, where a calm history overstates safety.

## See your portfolio’s Sharpe ratio with Exent

1. Upload a screenshot of your holdings, or a CSV, Excel, PDF or Google Sheet; no brokerage login.
2. Portfolio Analysis reports your Sharpe, Sortino and Calmar ratios next to a risk‑matched benchmark.

Exent is our product: [Exent portfolio check](https://www.exent.ai/portfolio)

## Frequently asked questions

### Is a Sharpe ratio of 1 good?

Yes, over several years it is good. The S&P 500’s 10-year Sharpe ratio to Sep 30, 2026 was 0.86, and its long-run figure since 1928 is closer to 0.4–0.5.

### What risk-free rate should I use?

Use a short-term Treasury bill yield for the same period as your returns. Using the wrong period can move the ratio noticeably.

### Can the Sharpe ratio be negative?

Yes. A negative Sharpe ratio means the portfolio returned less than cash over the period.

### Is a higher Sharpe ratio always better?

Usually, but not always. A very high figure over a short window often reflects luck or a calm market rather than skill.

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Educational content, not investment advice. Past performance does not guarantee future results.