sharpe ratio help

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Chris67
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sharpe ratio help

Post by Chris67 » Mon Jan 12, 2004 1:56 am

Dear All,

Never been a big believer in the usefulness of the sharpe ratio but for raising money purposes i need to use it.
If i have 12 months of system results what is the industry standard formula for calculation .. i.e what exactly is the standard deviation of returns .. is it multiplied by square root of 12 to annualise .. if you only have 12 months of results ?

Also what is the industry standard recocnised sortino calculation following on from above..


All help warmly appreciated

Regards

Chris

Kiwi
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Post by Kiwi » Mon Jan 12, 2004 3:35 am


Chris67
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Post by Chris67 » Mon Jan 12, 2004 4:51 am

Thanks Kiwi ,

I dont want to be pedantic but I looked on a tonne of these websites and theyve all got different definitions .. since the sharpe ratio is meant to be an industry standard ( regardless of our known dislike for it ) you would have thought somebody would have agreed on a simple formula and stick to it.

For example one of the links you gave states that st.deviation of returns is simply as it says ... however another link says this must be multiplied by the square root of 12 which will obviously have a large and detrimental effect on the shrpe

So lets do an example .. Consider this as years performance :

jan = 3.8 %
feb = 4.2 %
mar= -2.6 %
apr = 0.8 %
may = 1.2 %
june = 6.8 %
july = -4.1 %
august = 0.2 %
sept = 1.7 %
october = 10.1 %
nov = -1.9 %
dec = 0.8 %

Here we have a year making 21 % with a max monthly drawdown of -4.1 %

Therefore the sharpe is annual return - rfror / st.dev of returns

In this case that equals 21 - 2( for ex.) / 4.004

= 4.74

However if st.dev of returns are annualised sharpe = 1.37

which one is correct and how do i get the sortino ratio on that as a rough guide

Thanks again

Kiwi
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Post by Kiwi » Mon Jan 12, 2004 6:13 am

As you suggest. One is monthly based. The other annual. If you do a search of this site you will find a discussion involving c.f. and Mark (I think) that will make it clear to you why one might be preferred to the other and resolves the issues you raise.

John

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Post by kianti » Mon Jan 12, 2004 8:31 am

I suggest downloading Veritrader Demo.
In the User Guide .pdf file you will find an excellent description of the different ratios, pag 52
MAR Ratio = CAGR / Max Total Equity Drawdown

Modified Sharpe Ratio = Annualized Return / Annualized StdDev

...where Return = 12* Average Monthly Return
Risk Free Rate (excluded)
Annualized Std Dev = Square Root (12) * Std Dev Monthly Returns

Annual Sharpe Ratio = (Return – RFR) / Std Dev
...where Return = Compounded Annual Growth Rate
Risk Free Rate = 5% (annual)
Std Dev = Standard Deviation of Annual (calendar) Percentage
Returns


Annual Sortino Ratio = (Return – RFR) / Semi-Deviation
...where Return = Compounded Annual Growth Rate
Risk Free Rate = 5% (annual)
Semi-Deviation = Std Dev of negative Annual (calendar) data points

Chris67
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Post by Chris67 » Mon Jan 12, 2004 8:45 am

as I stated at the outset I only have 12 months of returns .. so taking a standard dev. of annual returns is not possible .. therefore do I ANNULAISE MONTHLY RETURNS ... or just take st.deviation of returns ...

kianti
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Post by kianti » Mon Jan 12, 2004 9:00 am

I guess a monthly returns and max DD% and the MAR ratio could do the job, an expert eye will quickly be able to value your performance.
I would also consider a leverage measure, like margins to equity.

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