The Sharpe ratio measures return above a safe rate, per unit of volatility. Higher means you were paid better for the bumps you endured.[1]
0.50
Decent risk-adjusted return
Sharpe = (return − risk-free rate) ÷ volatility. Higher means more reward for the bumpiness you took.
- Sharpe — reward per unit of total bumpiness, up and down.
- Sortino — reward per unit of downside bumpiness only, since upside swings don’t scare anyone.
- Calmar — reward compared with the worst drawdown.
Two students score 90%. One studied calmly; the other pulled frantic all-nighters. Same grade, very different “reward per unit of stress.”
No single number is perfect, but these stop you from being fooled by a high return that only came with stomach-churning risk.
Where these numbers come from
Finisdom computes Sharpe against the real risk-free rate from FRED, plus Sortino and Calmar, for any mix you build.