Sharpe Ratio
The Sharpe Ratio measures risk-adjusted returns by showing how much return is earned per unit of risk taken. Higher Sharpe Ratios indicate more efficient investments.
What You Will Learn: You'll discover how the Sharpe Ratio measures risk-adjusted returns by comparing excess returns to volatility. Learn how to calculate and interpret Sharpe Ratios to identify investments that deliver superior returns per unit of risk.
Definition
The Sharpe Ratio measures risk-adjusted returns by showing how much return is earned per unit of risk taken. Higher Sharpe Ratios indicate more efficient investments—delivering better returns without proportionally increasing volatility.
Formula
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard DeviationOr simply: Excess Return ÷ Total Volatility
Example Calculation
Portfolio Annual Return: 10%
Risk-Free Rate (10-yr Treasury): 4%
Standard Deviation (Volatility): 8%
Sharpe = (10% - 4%) / 8% = 0.75
Interpretation: For every 1% of volatility (risk) accepted, this investment delivers 0.75% of excess return above the risk-free rate.
Sharpe Ratio Interpretation
| Range | Assessment | Profile |
|---|---|---|
| >2.0 | Outstanding | Exceptional risk-adjusted returns |
| 1.0-2.0 | Good | Above-average efficiency |
| 0.5-1.0 | Acceptable | Marginally attractive |
| <0.5 | Poor | Inadequate return for risk taken |
| Negative | Destructive | Failing to beat risk-free rate |
Real Estate Sharpe Ratios (2000-2024)
| Property Type | Sharpe Ratio | Characteristics |
|---|---|---|
| MHC | 0.95 | Best risk-adjusted; consistent NOI growth |
| Industrial | 0.72 | Strong recent performance |
| Self-Storage | 0.68 | High returns but with cyclical volatility |
| Multifamily | 0.52 | Moderate returns, cyclical volatility |
| Retail | 0.18 | Poor efficiency—weak returns for risk |
| Office | -0.31 | Negative—destroyed value |
MHC's Historical Sharpe Performance
MHC's historical 0.95 Sharpe Ratio reflects 25 consecutive years of positive NOI growth with minimal volatility—historically delivering consistent returns with lower downside risk than other commercial real estate sectors.* *Past performance does not guarantee future results.
Limitations
- Assumes returns are normally distributed (they often aren't in real estate)
- Treats upside volatility the same as downside (investors only fear the downside)
- Sensitive to time period measured
- Can be gamed with low-probability tail risks
Never rely on Sharpe Ratio alone—always examine maximum drawdown, recovery time, and Sortino Ratio to understand tail risk.
Where to Find This on Our Site
See Sharpe Ratio analysis on our Research & Market Insights page, featuring:
- Performance Ratios charts including Sharpe Ratio comparisons
- Risk-adjusted performance analysis by asset class
- Interactive ratio toggles (Sharpe, Sortino, Treynor)
Related Terms
Explore Risk-Adjusted Performance Data
See comprehensive risk-return analysis across property types including Sharpe Ratios, Sortino Ratios, and more.
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