Sharpe Ratio Calculations - Using Daily Returns

[CG - Stock Trader]

Hi All,

Seeing if anyone is able to help me double check my Sharpe ratio calculations. For an example I've taken the daily returns of the S&P 500 Index (Data downloaded from Yahoo finance) from 1st February to 29th April (The time period i'm looking at).

For the risk free rate i'm using 0.16% which is the risk free rate IB use for their calculations.

- Since i'm doing daily returns I then divide this by 365 to get the daily risk free rate?

For the period the figures I get are;

Average excess return:0.1034%

Standard deviation:0.87%.

Dividing the average excess return by the standard deviation I then have an answer of 0.119

Since I'm using daily returns I then multiple this figure by the square root of 252( annual trading days) to get the final Sharpe ratio of 1.87.

Does this seem right? In most examples it says to just divide average excess return by the standard deviation and that's your answer.

The problem I have with this is that the Sharpe looks excessively low (in particular as the S&P performed very well during this time period). Interactive Brokers are also giving the Sharpe ratio for this time period at around 2.10 (relatively close to my figure).

Any help appreciated.

CG

 

[Belligerent_Drunk]

Hi All,

Seeing if anyone is able to help me double check my Sharpe ratio calculations. For an example I've taken the daily returns of the S&P 500 Index (Data downloaded from Yahoo finance) from 1st February to 29th April (The time period i'm looking at).

For the risk free rate i'm using 0.16% which is the risk free rate IB use for their calculations.

- Since i'm doing daily returns I then divide this by 365 to get the daily risk free rate?

For the period the figures I get are;

Average excess return:0.1034%

Standard deviation:0.87%.

Dividing the average excess return by the standard deviation I then have an answer of 0.119

Since I'm using daily returns I then multiple this figure by the square root of 252( annual trading days) to get the final Sharpe ratio of 1.87.

Does this seem right? In most examples it says to just divide average excess return by the standard deviation and that's your answer.

The problem I have with this is that the Sharpe looks excessively low (in particular as the S&P performed very well during this time period). Interactive Brokers are also giving the Sharpe ratio for this time period at around 2.10 (relatively close to my figure).

Any help appreciated.

CG

Hi,

How have you calculated the sdev figure?

You cant divide/multiply sdev without a time factor adjustment (you have multiply it with the SQRT of T).

EDIT: I think I know where the problem lies. You shouldn't calculate it on a daily basis. Try to calc it on the period basis. So return from feb to end of april, minus the rf for the period / the sdev of the returns in the period.

 

[darktrade]

I calculate 2.20.

 

[kardkovacsi]

Hi All,

Seeing if anyone is able to help me double check my Sharpe ratio calculations. For an example I've taken the daily returns of the S&P 500 Index (Data downloaded from Yahoo finance) from 1st February to 29th April (The time period i'm looking at).

For the risk free rate i'm using 0.16% which is the risk free rate IB use for their calculations.

- Since i'm doing daily returns I then divide this by 365 to get the daily risk free rate?

For the period the figures I get are;

Average excess return:0.1034%

Standard deviation:0.87%.

Dividing the average excess return by the standard deviation I then have an answer of 0.119

Since I'm using daily returns I then multiple this figure by the square root of 252( annual trading days) to get the final Sharpe ratio of 1.87.

Does this seem right? In most examples it says to just divide average excess return by the standard deviation and that's your answer.

The problem I have with this is that the Sharpe looks excessively low (in particular as the S&P performed very well during this time period). Interactive Brokers are also giving the Sharpe ratio for this time period at around 2.10 (relatively close to my figure).

Any help appreciated.

CG

It depends on the annualization. If you calculate with daily values then the Mean Return should be multiplied by 252 and the Standard Deviation should be multiplied by SQRT(252).
By the way you can calculate your accounts Sharpe Ratio with this software as well.