What Is a Good Sharpe Ratio?
A good Sharpe ratio depends on context, but many investors treat 1.0+ as acceptable, 1.5+ as strong, and 2.0+ as excellent over a meaningful time window.
This guide explains what is a good Sharpe ratio, how to interpret it, and how to improve risk-adjusted return.
Last updated: April 2026
Short Answer
A good Sharpe ratio is usually one that delivers higher excess return per unit of volatility, often 1.0+ for many long-term strategies.
What It Means
Sharpe ratio measures excess return per unit of volatility and helps compare how efficiently portfolios convert risk into return.
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Volatility
It helps compare two portfolios that may have similar return but different risk.
Sharpe Benchmarks (Rule of Thumb)
| Sharpe Range | Interpretation | Common Use |
|---|---|---|
| < 1.0 | Below target for many long-term strategies | Needs risk/return cleanup |
| 1.0 - 1.49 | Solid risk-adjusted efficiency | Often acceptable baseline |
| 1.5 - 1.99 | Strong risk-adjusted return | Competitive portfolio quality |
| 2.0+ | Excellent, but verify sustainability | Can reflect temporary regime tailwinds |
Numeric Example
Suppose a portfolio returns 11%, risk-free rate is 4%, and volatility is 10%.
Sharpe = (11% - 4%) / 10% = 0.70
A 0.70 Sharpe means return may not be compensating enough for volatility. Improving diversification, reducing concentration, and rebalancing can help.
How to Improve a Low Sharpe Ratio
The steps below show how investors typically improve risk-adjusted return in practice.
- 1. Reduce concentration in top holdings and highly correlated positions.
- 2. Rebalance toward a more stable risk budget across sectors/factors.
- 3. Remove redundant exposures that add volatility without improving expected return.
You can test these changes directly in the portfolio optimizer to see how Sharpe ratio, volatility, and concentration change and discover candidates in the stock screener.
Unique Insight
Many low-Sharpe portfolios are not low-return portfolios; they are high concentration portfolios with avoidable volatility drag.
Apply This Using Real Stocks
Use live pages to inspect volatility and risk-adjusted context before reallocating:
Related reading: how to improve Sharpe ratio.
FAQs
What is considered a good Sharpe ratio?
Many investors treat 1.0+ as acceptable, 1.5+ as strong, and 2.0+ as excellent, depending on timeframe and market regime.
Can a high Sharpe ratio be misleading?
Yes. A short measurement window or temporary market tailwind can inflate Sharpe, so multi-period validation is important.
How can I improve a low Sharpe ratio?
Improve diversification, reduce concentration, and rebalance using a risk budget to reduce volatility drag while preserving return potential.