Sharpe Ratio Singapore: How to Measure Investment Risk vs Return

Sharpe Ratio Singapore: How to Measure Investment Risk vs Return

The Sharpe Ratio is the single most widely used metric for measuring risk-adjusted investment performance. It tells you how much excess return you earn per unit of risk. For Singapore investors comparing S-REITs, ETFs, robo-advisors, or individual stocks, understanding the Sharpe Ratio helps identify whether higher returns are coming from skill or simply from taking more risk. Not financial advice.

Table of Contents

Contents — Click to expand
  1. What Is the Sharpe Ratio?
  2. Sharpe Ratio Formula
  3. How to Interpret the Sharpe Ratio
  4. Singapore Risk-Free Rate
  5. Worked Example: S-REIT Portfolio
  6. Limitations of the Sharpe Ratio
  7. Frequently Asked Questions

What Is the Sharpe Ratio?

The Sharpe Ratio is a risk-adjusted performance metric developed by Nobel Prize winner William F. Sharpe in 1966. It measures how much excess return (above the risk-free rate) an investment earns per unit of total risk (standard deviation). It is the standard tool for comparing portfolios, funds, and individual assets on a risk-adjusted basis.

Sharpe Ratio Formula

Sharpe Ratio = (Rp − Rf) ÷ σp

Where:

  • Rp = Portfolio return (annualised)
  • Rf = Risk-free rate (e.g. Singapore T-bill yield or CPF OA rate)
  • σp = Standard deviation of portfolio returns (annualised)

A higher Sharpe Ratio is better — it means more return per unit of risk taken.

How to Interpret the Sharpe Ratio

Sharpe Ratio Interpretation
Below 0 Underperforms the risk-free rate — take less risk
0 – 0.5 Below average risk-adjusted performance
0.5 – 1.0 Acceptable — typical for diversified equity portfolios
1.0 – 2.0 Good — strong risk-adjusted performance
Above 2.0 Excellent — rare for equity portfolios; common for low-volatility strategies

Singapore Risk-Free Rate

When calculating the Sharpe Ratio for Singapore-dollar portfolios, use one of these as the risk-free rate:

  • Singapore 3-month T-bill yield: ~3.0–3.5% as at Q1 2026 — the most commonly used market risk-free rate
  • CPF OA rate: 2.5% — a reasonable proxy for the guaranteed risk-free return available to all Singaporeans
  • Singapore Savings Bond (SSB) 1-year rate: ~2.8–3.2% — another option

The choice of risk-free rate matters — using a higher rate makes it harder for a portfolio to achieve a positive Sharpe Ratio.

Worked Example: S-REIT Portfolio

Assume a Singapore investor holds a diversified S-REIT portfolio:

  • Annual total return (dividends + price change): 8.5%
  • Annual standard deviation: 14%
  • Risk-free rate: 3.0% (Singapore T-bill)

Sharpe Ratio = (8.5% − 3.0%) ÷ 14% = 0.39

This is a below-average Sharpe Ratio — the investor is earning only 0.39% of excess return per 1% of volatility. Contrast with a global equity ETF (VWRA) with 10% return, 16% volatility: Sharpe = (10% − 3%) ÷ 16% = 0.44 — slightly better. Compare these to CPF SA at 4%, 0% volatility: theoretically infinite Sharpe Ratio.

See also: Risk-Adjusted Return Singapore and our Best S-REITs 2026 guide.

Limitations of the Sharpe Ratio

  • Assumes normal distribution of returns: Asset returns are often skewed — the Sharpe Ratio underestimates tail risk in volatile markets
  • Penalises upside volatility: A stock with large positive returns but occasional dips gets penalised even though the positive swings are desirable
  • Historical-only: Past Sharpe Ratios may not predict future performance
  • Not useful for comparing across currencies: A USD-based portfolio and an SGD-based portfolio should not be compared directly without adjusting for FX volatility

The Sortino Ratio, which only penalises downside volatility, addresses some of these limitations. See our risk-adjusted return guide for more details.

Frequently Asked Questions

What is the Sharpe Ratio in simple terms?
The Sharpe Ratio tells you how much return you get per unit of risk. A higher ratio means better risk-adjusted performance. For example, two portfolios both returning 8% — but one with half the volatility — has double the Sharpe Ratio and is clearly superior on a risk-adjusted basis.
What risk-free rate should Singapore investors use?
Use the Singapore 3-month T-bill yield (~3.0–3.5% in 2026) for market comparisons, or the CPF OA rate (2.5%) as the opportunity cost for CPF-eligible investors. The exact rate chosen will affect the Sharpe Ratio — be consistent when comparing portfolios.
Do robo-advisors in Singapore report Sharpe Ratios?
Some do — Endowus, StashAway, and Syfe periodically publish risk-adjusted return metrics in their performance reports. Compare these carefully, as they may use different risk-free rates and calculation periods. Always compare over the same time period.
Is a Sharpe Ratio of 0.5 good for an S-REIT portfolio?
A Sharpe Ratio of 0.5 is acceptable but not outstanding for an S-REIT portfolio. It means you are earning 0.5% of excess return per 1% of risk. For context, long-run S&P 500 index returns have historically produced Sharpe Ratios of 0.5–0.7 — so 0.5 is roughly in line with broad equity markets.
Can the Sharpe Ratio be negative?
Yes — a negative Sharpe Ratio means the portfolio underperformed the risk-free rate. This occurred for many S-REIT portfolios during 2022–2023 when rising interest rates caused sharp unit price declines, dragging total returns below T-bill yields despite positive distributions.