Risk & position sizing
How do I calculate and optimize my portfolio's Sharpe Ratio?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
The Sharpe Ratio measures risk-adjusted return by dividing a portfolio's excess return over the risk-free rate by its standard deviation, with higher values indicating better return per unit of volatility.
How it works
Optimizing Sharpe Ratio involves improving returns, reducing unnecessary volatility, or both, often through diversification or reducing exposure to highly erratic positions without sacrificing expected gains.
An example
A portfolio returning 12% annually with 10% volatility and a 2% risk-free rate has a Sharpe Ratio of 1.0, calculated as (12%-2%) divided by 10%.
Risk & limitations
Sharpe Ratio penalizes both upside and downside volatility equally, which can understate risk-adjusted performance for strategies with large positive swings.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.