# Did You Beat the Market Risk‑Adjusted? How to Check

> Beating the S&P 500 by taking more risk is not skill, and trailing it with much less risk is not failure. Here is how to measure risk-adjusted outperformance, with a worked example from real backtests.

Source: https://www.exent.ai/resources/risk-adjusted-outperformance · Reviewed by David, Senior Analyst, Exent · Published Oct 28, 2026 · Updated Oct 28, 2026

## Key takeaways

- Compare return per unit of risk. You beat the market risk‑adjusted if your Sharpe ratio beats the S&P 500’s over the same period, or if you beat an index mix scaled to your volatility.
- Higher return is not enough: in Exent’s backtest (Jul 2016–Sep 2026) the momentum factor beat the S&P 500 on return, 16.2% vs 15.2% a year, but lost on Sharpe ratio, 0.81 vs 0.88.
- The bar is high: only 74 of 470 large US stocks (16%) beat the S&P 500’s Sharpe ratio over the 5 years to Sep 2026.
- Use at least three years of monthly, time-weighted returns, net of fees, over exactly the same dates as the benchmark.

## What does it mean to beat the market on a risk‑adjusted basis?

It means you earned more return for each unit of risk you took than the market did. Risk usually means volatility (how much returns swing) or drawdown (how far the portfolio fell from a peak). An investor who matched the S&P 500’s return with half its swings beat it on a risk-adjusted basis. An investor who beat it by 2 points a year with twice its swings probably did not.

Why it matters: anyone can raise expected return by taking more risk, for example by holding more volatile stocks or using leverage. Risk-adjusted measures separate that from genuine edge. They also tell you whether the portfolio you hold is one you can live with in the next crash.

## Which measures should I use?

| Measure | What it asks | Beat the market if… |
| --- | --- | --- |
| [Sharpe ratio](https://www.exent.ai/learn/sharpe-ratio) | Return above cash per unit of total volatility | Yours is higher than the index’s over the same dates |
| [Sortino ratio](https://www.exent.ai/learn/sortino-ratio) | Return above cash per unit of downside volatility only | Yours is higher; useful when gains are lumpy |
| Calmar ratio | Annual return per unit of maximum drawdown | Yours is higher; focuses on the worst fall |
| Alpha | Return beyond what your market exposure (beta) explains | It is positive after fees |
| [Risk-matched benchmark](https://www.exent.ai/learn/risk-matched-benchmark) | What an index mix with your volatility earned | Your return is higher than that mix |
| Information ratio | Excess return over the benchmark per unit of tracking error | It is positive, and consistently so |

For most individual investors, two are enough: the Sharpe ratio against the S&P 500, and return against a risk-matched benchmark. Add maximum drawdown, because it is the number that decides whether people sell at the bottom.

## A worked example with real backtests

Exent’s strategy backtests cover July 2016 to September 2026, monthly, with dividends. They are hypothetical and ignore taxes, but they show clearly how return and risk-adjusted return can disagree.

| Backtest (Jul 2016–Sep 2026) | Annual return | Volatility | Sharpe | Max drawdown | Risk-adjusted vs S&P 500 |
| --- | --- | --- | --- | --- | --- |
| [S&P 500 (SPY)](https://www.exent.ai/strategies/sp500) | 15.2% | 15.2% | 0.88 | 23.9% | Baseline |
| [Nasdaq-100 (QQQ)](https://www.exent.ai/strategies/nasdaq-100) | 21.5% | 18.8% | 1.03 | 32.6% | Beat on Sharpe, deeper drawdown |
| [Momentum (MTUM)](https://www.exent.ai/strategies/momentum) | 16.2% | 18.0% | 0.81 | 30.2% | Higher return, lower Sharpe |
| [Quality (QUAL)](https://www.exent.ai/strategies/quality) | 14.2% | 15.5% | 0.81 | 27.8% | Lower on both |
| [60/40 stocks and bonds](https://www.exent.ai/strategies/sixty-forty) | 9.5% | 10.1% | 0.75 | 20.0% | Less risk, but lower Sharpe |
| [Minimum volatility (USMV)](https://www.exent.ai/strategies/minimum-volatility) | 9.4% | 12.2% | 0.63 | 19.1% | Less risk, lower Sharpe |

**Momentum is the instructive case.** It beat the S&P 500 by a point a year, so on a raw-return league table it “won”. But it took 18% volatility to do it. Multiplying each Sharpe ratio by 18% gives the excess return over cash each would earn at that level of risk: about 15.8 points for the S&P 500 and 14.6 for momentum. Scaled up to the same risk, the plain index would have earned roughly 1.3 points a year more (15.84 − 14.58). Risk-adjusted, momentum lost.

**The Nasdaq-100 is the opposite.** Its Sharpe ratio of 1.03 beat the index’s 0.88, so it earned more per unit of volatility over this period. It also fell 32.6% at its worst, so the Calmar view is less flattering. One measure rarely settles the question.

**Lower risk is not automatically a win either.** The 60/40 mix and the minimum-volatility fund fell less, but in this decade their Sharpe ratios were below the index’s. Lower volatility was paid for with more return than it saved.

## How do I build a risk‑matched benchmark?

Blend the index with cash until the blend has the same volatility as your portfolio, then compare returns. If your portfolio is less volatile than the index, the blend holds some cash; if it is more volatile, the blend is levered. The formula for the stock weight is your volatility divided by the index’s volatility.

Illustrative example, not a real account:

| Illustrative | Value |
| --- | --- |
| Your portfolio: annual return / volatility | 11.0% / 12.0% |
| S&P 500: annual return / volatility | 15.2% / 15.2% |
| Cash return (assumed) | 2.0% |
| Benchmark stock weight = 12.0 ÷ 15.2 | 79% S&P 500 + 21% cash |
| Benchmark return = 0.79 × 15.2% + 0.21 × 2.0% | 12.4% |
| Your result vs the risk-matched benchmark | −1.4 points a year |

This investor trailed the S&P 500 by 4.2 points, but most of that gap came from taking less risk. The fair verdict is a 1.4 point shortfall, which is the part worth investigating.

## How is alpha calculated?

Alpha is your return minus the return your market exposure alone would have produced. The standard version is: alpha = your return − [cash return + beta × (index return − cash return)], where beta measures how much your portfolio moves with the index.

Illustrative example: you returned 16% in a year when the index returned 15% and cash 2%. Your beta was 1.2. Your expected return was 2% + 1.2 × 13% = 17.6%, so your alpha was −1.6%. You beat the index and still had negative alpha, because a portfolio that moves 1.2 times as much as the market should beat it in a rising year. See alpha vs beta.

## What mistakes make the comparison wrong?

- Different dates: your portfolio from March, the index from January. Use identical start and end dates.
- Price return vs total return: comparing your dividends-included result with a price-only index flatters you by the dividend yield.
- Money-weighted returns: deposits and withdrawals distort the result. Use time-weighted returns to judge the strategy.
- Too short a window: one year of data cannot separate skill from luck. Use at least three years of monthly returns.
- Gross of fees: compare after every fee, spread and commission, because the index fund’s cost is close to zero.
- One measure only: check Sharpe, drawdown and a risk-matched benchmark together.

## How can I check my own portfolio?

You can do it in a spreadsheet with monthly returns for your portfolio and the index. The steps are in how to calculate your portfolio return. Compare your Sharpe ratio and maximum drawdown with a risk-matched benchmark, not only your raw return with the index. Related reading: [can you beat the market with less risk?](https://www.exent.ai/resources/beat-market-with-less-risk) and the [portfolio optimization](https://www.exent.ai/portfolio-optimization) guide.

## How to measure this in Exent

1. Upload a screenshot of your holdings, or a CSV, Excel, PDF or Google Sheet; no brokerage login.
2. Exent reports Sharpe, Sortino and Calmar ratios and maximum drawdown for your holdings.
3. A risk‑matched benchmark shows whether your return beat a mix with the same risk, not just the index.
4. The efficient frontier shows whether a different weighting of the same holdings had more return per unit of risk.

Exent is our product: [Exent Market intel](https://www.exent.ai/intel)

## Frequently asked questions

### How do I know if I beat the market on a risk-adjusted basis?

Compare your Sharpe ratio with the S&P 500’s over exactly the same dates, using monthly time-weighted returns after fees. A cross-check is to compare your return with an index-and-cash mix that has the same volatility as your portfolio.

### What is a good Sharpe ratio compared with the S&P 500?

One higher than the index’s over the same period. In Exent’s backtest from July 2016 to September 2026 the S&P 500’s Sharpe ratio was 0.88, but the figure changes with the period, so always compare like for like.

### Is alpha the same as beating the market?

No. Beating the market means a higher return than the index. Alpha means a higher return than your market exposure explains; a high-beta portfolio can beat the index in a rising year and still have negative alpha.

### Can I outperform the market with lower returns?

On a risk-adjusted basis, yes. If your return is lower but your risk is much lower, you can beat a risk-matched benchmark and have a higher Sharpe ratio than the index.

### How many years of data do I need?

At least three years of monthly returns, and ideally a full market cycle that includes a significant decline. Shorter windows mostly measure luck.

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