Learn/Calculators/Risk and drawdown
Sharpe ratio and volatility from your monthly returns.
Paste a series of monthly returns in percent. The calculator annualises the volatility and the return and works out the Sharpe ratio.
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01How it works
In plain words.
Volatility is the standard deviation of the monthly returns, scaled to a year by the square root of 12. The Sharpe ratio is the yearly excess return over the risk free rate, divided by that volatility: return per unit of risk.
The formula
Volatility = stdev(monthly returns) x sqrt(12)Sharpe = (mean monthly return x 12 - risk free) / volatilityCompound return = (product of (1 + r))^(12 / months) - 102Worked example
The default numbers, by hand.
The 24 month sample: mean 0.82% a month (9.85% a year), standard deviation 2.12%, so volatility 2.12% x 3.464 = 7.35% and Sharpe (9.85% - 6.5%) / 7.35% = 0.46.
| Input | Value |
|---|---|
| Monthly returns, % (sample series) | 24 values (the default sample) |
| Risk free rate a year | 6.5% |
| Result | Value |
|---|---|
| Sharpe ratio | 0.46 |
| Volatility, annualised | 7.35% |
| Return, annualised (compound) | 10.02% |
| Maximum drawdown | −3.90% |
| Best month | 4.1% |
| Worst month | −3.9% |
| Months in the series | 24 |
03Key concepts
What to know before you use it.
What Sharpe tells you
How much return a strategy earned for each unit of volatility. Above 1 is strong for an equity strategy over a long period; short samples can mislead.
What it misses
Volatility treats rises and falls alike and assumes a bell curve. The maximum drawdown card shows the fall that volatility can understate.
Good to know
- Use the yield of a 91 day T-bill or a similar rate as the risk free rate, stated with its date.
- Compare Sharpe ratios only over the same dates.
04Assumptions
What the calculator assumes.
- Monthly returns, in percent; the arithmetic mean for Sharpe, the compound mean for the return.
- Sample standard deviation (n - 1).
05Questions
Asked about the Sharpe and volatility.
How do you calculate the Sharpe ratio?
Subtract the risk free rate from the annualised return and divide by the annualised volatility. From monthly data: (mean x 12 - risk free) / (stdev x sqrt(12)).
How do you annualise monthly volatility?
Multiply the monthly standard deviation by the square root of 12.
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06Keep going
Learn the idea, see it applied.
More risk and drawdown calculators
Education only, not investment advice. RupeeCase is a technology platform operated by QC Alpha Technologies Pvt Ltd; it is not a fund, a PMS or a SEBI registered investment adviser. Model returns are back tested and not a promise of future returns. Figures carry the date they were checked.