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If your average monthly return is M, your average annual return is 12*M.
If the variance of your monthly returns is S^2, your annual variance is
12*S^2. Likewise, if your monthly standard deviation is S, your annual
standard deviation is SQRT(12)*S, as standard deviation is the square root
of variance.
Sharpe ratio (ignoring risk-free rate factors) is mean/standard deviation.
If you monthly Sharpe ratio is M/S, your annual Sharpe is
(12*M)/(SQRT(12)*S) = SQRT(12)*M/S.
Remember, variances are additive, standard deviations are not. Var(X+Y) =
Var(X) + Var(Y).
Aaron Schindler
----- Original Message -----
From: "Chris Evans" <evanscje@xxxxxxxxxxxxx>
To: "Omega List" <omega-list@xxxxxxxxxx>
Sent: Tuesday, May 14, 2002 10:59 AM
Subject: Sharpe ratio
> .. Does anyone know the algebra behind the calculation that says that you
must multiply a monthly time series driven Sharpe ratio by Sq Rt 12 in order
to annualize it??
>
> CJE
>
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