Two Portfolios, Same Return, Very Different Risk: What Sharpe Ratio Actually Tells You
5 min read
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5 min read
Two friends compare portfolios at the end of the year. Both are up 14%. One slept fine every night. The other checked prices at 2am and nearly sold everything in March.
Same return. Completely different experience. The Sharpe ratio is the number that tells those two portfolios apart, and most people never look at it.
Return on its own is half a sentence. It tells you what you got. It says nothing about what you went through to get it.
The Sharpe ratio finishes the sentence. It asks: how much extra return did you earn for each unit of turbulence you put up with?
Three pieces go into it, and each one is simpler than it sounds.
Your return. What the portfolio made over the period.
The risk-free rate. What you could have earned taking no real risk at all. In Indonesia the natural anchor is the BI Rate, which Bank Indonesia held at 5.75% at its 21 to 22 July 2026 meeting. If your investments cannot beat that, you took risk for nothing.
Volatility. How much your portfolio value bounced around along the way. Statistically it is the standard deviation of your returns. In plain terms: were the monthly moves gentle, or were they violent?
(Portfolio return − Risk-free rate) ÷ Volatility
Here are two portfolios that finish the year in exactly the same place.
| Portfolio A | Portfolio B | |
|---|---|---|
| Return for the year | 14% | 14% |
| Risk-free rate (BI Rate) | 5.75% | 5.75% |
| Return above risk-free | 8.25% | 8.25% |
| Volatility | 8% | 28% |
| Sharpe ratio | 1.03 | 0.29 |
Portfolio A earned roughly one unit of excess return for every unit of turbulence. Portfolio B earned less than a third of that, for the identical result.
Portfolio B's year involved months where it was down heavily and months where it screamed back. Portfolio A drifted upward. The scoreboard cannot tell them apart. The Sharpe ratio can.
There is no universal pass mark, but these bands are a reasonable working guide, and they are the same thresholds NetWort uses when it colours the metric on your dashboard.
Above 1.0. Solid. You are being paid properly for the risk you carry.
Between 0.5 and 1.0. Acceptable, with room to improve. Often a sign of concentration in a few volatile positions.
Below 0.5. The turbulence is not buying you much. Worth asking what a calmer allocation would have produced.
Negative. Your portfolio underperformed the risk-free rate. You would have done better leaving the money somewhere boring.
It is tempting to shrug at volatility. If both portfolios ended at 14%, who cares about the path?
Two reasons to care.
The first is behavioural, and it is the one that actually costs people money. Portfolio B's owner nearly sold in March. Plenty of people in that position do sell, at the bottom, and never get the 14%. A portfolio you cannot hold through a bad quarter is not really yours.
The second is that high volatility means a wider spread of outcomes. Portfolio B ending at +14% was one draw from a distribution that could as easily have delivered −10%. Portfolio A's range was much narrower. Same result this year, very different odds next year.
The Sharpe ratio treats all volatility as bad, including the upward kind. A portfolio that occasionally leaps 20% in a month gets penalised for it, even though nobody complains about that particular surprise.
It also depends heavily on the period you measure. A Sharpe ratio computed over a calm six months will flatter a portfolio that has never been stress tested. Longer windows are more honest.
And it assumes returns are reasonably well behaved. Assets prone to sudden crashes, which includes plenty of crypto, can post a respectable Sharpe ratio right up until the month they do not. Read it alongside maximum drawdown, not instead of it.
You need your return over a period, the risk-free rate for that period, and the standard deviation of your returns. In a spreadsheet the volatility piece is STDEV over your monthly returns, then multiplied by the square root of 12 to annualise it.
NetWort computes this from your actual transaction history, so it reflects your real cash flows rather than a tidy assumption that you invested everything on day one. The same distinction applies to your headline return, which is why your broker's percentage and your real return often disagree.
Your Sharpe ratio sits in the Portfolio Health section of your dashboard, next to volatility, beta and maximum drawdown. Open it and look at all four together. If your return looks good but your Sharpe ratio is under 0.5, the number to investigate is not the return. It is what you are paying for it. And if you are not sure the return itself is good to begin with, benchmarking it against IHSG or the S&P 500 is the place to start.
For the current BI Rate and the wider rate picture that feeds this calculation, see the macro context page.