Question 1

How is the Sharpe ratio calculated?

Accepted Answer

The Sharpe ratio subtracts the risk-free baseline from the strategy's annualized return, then divides what is left — the excess return — by the strategy's annualized volatility. A percentage divided by a percentage, it is a plain number with no unit. $$ 	ext{Sharpe ratio} = \frac{{	ext{annualized return}} - {	ext{risk-free rate}}}{{	ext{annualized volatility}}} $$ where: the strategy's annualized return over the backtest the risk-free rate, a near-riskless baseline over the same window the standard deviation of the strategy's returns, scaled to a year with the square-root-of-252 convention

Question 2

How does Fincanva handle it?

Accepted Answer

A backtest's Performance Metrics page opens on four tiles: Sharpe ratio, Volatility, Longest drawdown and CAGR vs benchmark. The metrics table shows it in the Volatility and risk group as the row Sharpe; the KPI strip calls the same figure Sharpe ratio. The by-year table repeats it per calendar year, computed on that year's own return and volatility. The risk-free rate is a real market rate, not a fixed assumption: the 3-Month US Treasury Bill secondary-market rate, the FRED daily series DTB3 (from 1954), matched to your backtest's own date window. A strategy tested through a high-rate decade is held to a higher bar than one tested through a near-zero-rate decade. The risk-free rate page owns the series, and the metrics table's risk-free rate row shows its period average. On the Strategy analytics page's Return and oscillation card each strategy is a dot labelled Sharpe, on a line that starts at the risk-free rate: the steeper the line, the higher the ratio. Narrow that page to a single year and the lines disappear; the page explains why. It turns negative whenever the annualized return fell below the risk-free rate over the period.

Question 3

What does it look like in practice?

Accepted Answer

A strategy returns 11% a year over its backtest while the risk-free rate averaged 3% over the same window, and its annualized volatility was 10%. The excess return is 11% − 3% = 8 percentage points, so the Sharpe ratio is 8 ÷ 10 = 0.8: the strategy earned 0.8 units of excess return for each unit of volatility.

Now take a second strategy that returned the same 11% a year with volatility of 20%. Its excess return is the same 8 points, but its Sharpe ratio is 8 ÷ 20 = 0.4 — the same reward, from twice the variability. Headline return alone would have called these two identical.

Question 4

Which return feeds the Sharpe ratio, CAGR or AAGR?

Accepted Answer

It depends on where you read it. On the metrics table — the Sharpe row and the KPI strip's Sharpe ratio — the annualized-return term follows the same Reinvest profits switch as the annualized-return row in Performance Metrics: it is the CAGR when Reinvest profits is on, and the AAGR when it is off. The by-year table and the Strategy analytics page always use CAGR, whatever the setting.

This matters when comparing runs, because AAGR ignores compounding and usually reads higher than CAGR over multi-year gains. Two backtests of the same strategy that differ only in the Reinvest profits setting therefore feed different numerators into the metrics-table Sharpe ratio, and those Sharpe values are not directly comparable.

Question 5

Does the screener's Sharpe subtract the risk-free rate?

Accepted Answer

No. The Sharpe a screener shows is return divided by volatility with no risk-free rate subtracted, unlike the Sharpe ratio a backtest reports. It is measured on the instrument's own adjusted price: its annualized return over a trailing window, divided by the annualized volatility of its daily price moves over the same window.

The Sharpe column on the Returns tab of a screener's results table covers the last 12 months.
The Sharpe Ratio filter covers the number of months you set in its Months input, from 1 to 36. Positive Sharpe Ratio is the same measure, keeping only values above zero.

Because nothing is subtracted, the screener's figure reads higher than an excess-return Sharpe whenever short-term rates are above zero, so an instrument's screener Sharpe and a strategy's backtest Sharpe are not comparable. The filter's description in the app speaks of subtracting a Treasury-bill rate; the value the screener computes does not.

Question 6

What counts as a good value?

Accepted Answer

A higher Sharpe ratio means more excess return per unit of variability; zero means the strategy merely matched the risk-free baseline, and a negative value means it trailed it. Since the ratio is a plain number, a move from 0.4 to 0.8 is a doubling of return per unit of risk, not "0.4 percentage points".

The Sharpe ratio treats every swing as risk, upward ones included, so a burst of good months lowers it — the Sortino ratio counts only downside variability. It says nothing about the worst single fall, which is max drawdown, or about return against that fall, which is the return-to-drawdown ratio. And because both inputs are measured over the backtest's own window, Sharpe ratios from windows of different lengths or rate environments are not like-for-like.

No Sharpe ratio is a target to aim for or a promise about future risk.