Financial
Sharpe Ratio formula: periodic and annualized risk-adjusted return
Measure excess return per unit of volatility with (AVERAGE(Returns) - RiskFree) / STDEV.S(Returns) and scale periodic Sharpe by SQRT(PeriodsPerYear).
Square-root annualization under its assumptions
For a constant periodic risk-free rate, divide mean excess return by sample return volatility.
Under zero serial correlation and the additive-return scaling assumptions, multiply the periodic ratio by the square root of periods per year.
| Metric (Quarterly Returns [3%, 3%, 3%, 11%]) | Formula | Value |
|---|---|---|
| Mean Quarterly Return | =AVERAGE(A2:A5) | 5.00% (0.05) |
| Quarterly Volatility (SD) | =STDEV.S(A2:A5) | 4.00% (0.04) |
| Quarterly Sharpe (RF = 3%/qtr) | =(0.05 - 0.03) / 0.04 | 0.50 |
| Annualized Sharpe (k = 4 qtrs/yr) | =0.50 * SQRT(4) | 1.00 |
Annualized and periodic Sharpe Ratio formulas
Ensure RiskFreeRate in B2 matches the exact periodicity (quarterly, monthly, or daily) of your return series A2:A5!
=ROUND(((AVERAGE(A2:A5) - B2) / STDEV.S(A2:A5)) * SQRT(C2), 4)Unannualized periodic Sharpe Ratio
Measures excess return per 1 standard deviation of single-period spread.
=ROUND((AVERAGE(A2:A5) - B2) / STDEV.S(A2:A5), 4)Inputs and interpretation
The example assumes a constant risk-free return for each observation period, at least two numeric returns and positive sample standard deviation. Square-root annualization assumes additive excess returns with zero serial correlation and stable variance; it is not generally exact for compounded returns or correlated observations. With varying risk-free returns, calculate a series of excess returns and use its own standard deviation.
Try the example
Use the original values or change them to test your understanding.