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Sharpe Ratio - Issues calculating

Jef

Joined
1/4/17
Messages
2
Points
11
I need to calculate Sharpe Ratio for my trading system. I am getting a number I feel is too high. Can someone tell me what you get based on the following 2 months returns. Thank you in advance.
November 2016 = 10.6027%
December 2016 = 10.1901%

I used a risk free return of 3%/year or 0.25%/month. Based on these numbers, are my Share Ratio calculations correct?
 
Jef said:
I need to calculate Sharpe Ratio for my trading system. I am getting a number I feel is too high. Can someone tell me what you get based on the following 2 months returns. Thank you in advance.
November 2016 = 10.6027%
December 2016 = 10.1901%

I used a risk free return of 3%/year or 0.25%/month. Based on these numbers, are my Share Ratio calculations correct?
Click to expand...

You haven't provided enough information to calculate it. I wouldn't worry about the risk free rate. Use daily returns and just take your annualized return and divide it by the annualized standard deviation of those daily returns.
 
I cannot use daily or weekly returns unless I calculated the daily or weekly NAV for each position as positions are held over a multi-day period. As such, a position might yield a negative NAV yet it has not stopped out. As such, it would have a negative impact on the portfolios results, which is incorrect. Volatility of a position within its acceptable range should not have a negative impact on any statistical measurement.

That said, I must use monthly results and I have only been running the system 2 months. I know the results will be worthless with so little data, but they can be calculated. I ran them and my Sharpe Ratio was 170.37, hence why I wanted someone else to run the #s just to double check my math. Thanks in advance.
 
You are supposed to use the daily mark-to-market of whatever position you are running, regardless of whether or not it is stopped out. This isn't a hold to maturity thing for each individual investment. This exercise won't make sense otherwise. Also you simply can't calculate a standard deviation on 2 data points.
 
Do this:
1. List the close price of each trading session (length N)
2. List the profit between each trading session and the previous one (length N-1)
3. Get the average of 2 above = AVG
4. Get the standard deviation of 2 above = STD
5. Take the risk free rate (ex: 4.57%) and divide it by 252 (average number of trading days in a year) to get the daily risk-free rate = RFR
6. Take (AVG - RFR) / STD * Sqrt(252) which is your annualized Sharpe

If this is incorrect, please let me know.
 
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