The realized or expected annual return of the investment.
%
Typically the yield of a US Treasury Bill (e.g., 3-month T-Bill).
%
A measure of the investment's total risk or price fluctuation.
β
Optional: Used for Treynor Ratio calculation. Market Beta is usually 1.0.
Sharpe Ratio0.00
Excess Return (Spread):0.00%
Treynor Ratio:—
Risk Efficiency Rating:—
function calculateRiskAdjustedReturn() {
// Get Inputs
var portReturn = parseFloat(document.getElementById('portfolioReturn').value);
var rfRate = parseFloat(document.getElementById('riskFreeRate').value);
var stdDev = parseFloat(document.getElementById('stdDev').value);
var beta = parseFloat(document.getElementById('betaVal').value);
// Validation
if (isNaN(portReturn) || isNaN(rfRate) || isNaN(stdDev)) {
alert("Please enter valid numbers for Return, Risk-Free Rate, and Standard Deviation.");
return;
}
if (stdDev === 0) {
alert("Standard Deviation cannot be zero.");
return;
}
// Calculations
var excessReturn = portReturn – rfRate;
// Sharpe Ratio = (Rp – Rf) / Sigma
var sharpeRatio = excessReturn / stdDev;
// Treynor Ratio = (Rp – Rf) / Beta
var treynorRatio = "N/A";
if (!isNaN(beta) && beta !== 0) {
treynorRatio = (excessReturn / beta).toFixed(2);
} else if (beta === 0) {
treynorRatio = "inf";
}
// Determine Rating based on Sharpe
var rating = "";
if (sharpeRatio < 0) {
rating = "Poor (Negative Return)";
} else if (sharpeRatio = 1 && sharpeRatio = 2 && sharpeRatio < 3) {
rating = "Very Good";
} else {
rating = "Excellent";
}
// Display Results
document.getElementById('results-area').style.display = 'block';
document.getElementById('sharpeResult').innerText = sharpeRatio.toFixed(2);
document.getElementById('excessReturnResult').innerText = excessReturn.toFixed(2) + "%";
document.getElementById('treynorResult').innerText = treynorRatio;
document.getElementById('ratingResult').innerText = rating;
}
Understanding Risk Adjusted Rate of Return
Investing is rarely about maximizing returns in a vacuum. It is about maximizing returns relative to the amount of risk taken to achieve them. The Risk Adjusted Rate of Return Calculator helps investors evaluate the efficiency of an investment portfolio by factoring in volatility and market exposure.
Two distinct portfolios might both earn 10% in a year, but if one fluctuated wildly (high risk) while the other remained stable (low risk), the stable portfolio is considered superior on a risk-adjusted basis. This calculator primarily uses the **Sharpe Ratio** and the **Treynor Ratio** to quantify this efficiency.
What is the Sharpe Ratio?
The Sharpe Ratio is the most widely used metric for calculating risk-adjusted return. It was developed by Nobel laureate William F. Sharpe. The formula measures the excess return per unit of deviation (total risk) in an investment asset or a trading strategy.
Formula: (Portfolio Return – Risk-Free Rate) / Standard Deviation
Interpretation: A higher Sharpe ratio indicates a better historical risk-adjusted performance. generally, a ratio greater than 1.0 is considered acceptable to good by investors.
What is the Treynor Ratio?
While the Sharpe Ratio accounts for total risk (standard deviation), the Treynor Ratio looks specifically at systematic risk, also known as Beta ($\beta$). Systematic risk is the risk inherent to the entire market which cannot be diversified away.
Usage: This metric is particularly useful for well-diversified portfolios where specific asset risk has been minimized, leaving only market risk.
Key Definitions for this Calculator
Portfolio Return (%): The actual or expected annual percentage return of the investment.
Risk-Free Rate (%): The theoretical return of an investment with zero risk. In practice, this is usually the yield on a 3-month U.S. Treasury Bill.
Standard Deviation (%): A statistical measurement that sheds light on historical volatility. High standard deviation implies the price moves significantly up and down (higher risk).
Beta: A measure of a stock's volatility in relation to the overall market. A beta of 1.0 means the investment moves in lockstep with the market. A beta of 2.0 means it is twice as volatile.
How to Interpret Your Results
When you input your data, the calculator provides the Excess Return, which is simply your return minus the risk-free rate. This represents the compensation you are receiving for taking on risk.
The Sharpe Ratio tells you if that compensation is adequate.
– Below 1.0: The return may not justify the volatility risk taken.
– 1.0 to 1.99: Good risk-adjusted returns.
– 2.0 to 2.99: Very good performance.
– 3.0+: Excellent performance (rare to sustain over long periods).