# Sharpe Ratio (again)

#### tafita

##### Guest
Greetings,

You may be forgiven for groaning at yet another post about Sharpe Ratio. For the record I am new to trading and was advised to use this ratio as a way of analysing historical performance and could use a little assistance with my findings thus far.

The portfolio can go long or short and consists of FTSE 100 stocks only and so the Index has been used as the benchmark. This is a deviation from standard Sharpe Ratio calculations since the benchmark normally requires a risk free investment such as the bank of England base rate. I have calculated the monthly returns from the FTSE using the closing price of the last trading day of the month (for 5 months NOV - MAR) as follows:

FTSE BEGIN BALANCE
6129.20
6,048.80
6,220.80
6,203.10
6,171.50
6,308.00

FTSE END BALANCE
6,048.80
6,220.80
6,203.10
6,171.50
6,308.00

FTSE % CHANGE
-1.312%
2.844%
-0.285%
-0.509%
2.212%

This calculation uses the same method for calculating the monthly returns from the portfolio.

Next, the difference in percentage returns from the benchmark index and the portfolio were calculated i.e. the portfolio % change minus the FTSE % change. Please see hypothetical example below:

PORFOLIO% CHANGE
0.692%
12.760%
5.652%
0.046%
16.271%

MINUS

FTSE % CHANGE
-1.312%
2.844%
-0.285%
-0.509%
2.212%

% CHANGE DIFFERENTIAL
2.004%
9.917%
5.937%
0.556%
14.059%

Note the % change differential totals. These figures were then used to calculate the average of the % change differential which in this hypothetical case is 6.494%. This was achieved via the autosum function in Excel for averages.

The next step was to calculate the standard deviation of the % change differential values (5.58) i.e. using the autosum function in Excel for standard deviation (STDEV).

The final piece of the jigsaw would be to calculate the Sharpe Ratio by simply dividing the average return (6.494) by the standard deviation (5.58). In the example above this equates to 1.163. The results are below:

Differential Average 6.494%

Standard Deviation 5.58%

Sharpe Ratio 1.163

I would be grateful for feedback regarding these calculations and the usefulness of using an index as a benchmark. What benchmark should be used?

Tafita

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