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> I am trying to calculate a Sharpe Ratio for a hedge fund with
> results from Jan 1995 through the present, and would like to know
> the correct value to use for risk free rate of return. At inception
> Jan 1995 the 90 day T-Bill rate was 5.84%. The average from Jan
> 1995-Nov 2003 was 4.09%. The current rate is .091%. What is the
> proper method? Is there a commonly accepted method? Rolling 3 yr
> avg? Avg since inception?
I believe the most correct way is to use the Tbill rate for each
period during your calculation. (Sharpe isn't too clear on this
point in the papers I've seen.) So if you have monthly returns
for your hedge fund, get the monthly Tbill rates for the same
period. Subtract each month's Tbill rate from the fund's monthly
return, and use the remaining "excess return" in the Sharpe
calculation.
You can get the Tbill rates at
http://wwws.publicdebt.treas.gov/AI/OFAuctions?form=phase1&typesec=bills&searchtype=auction
> I hate Sharpe and prefer annualized std dev/annual return,
Ummm, do you realize that Sharpe is generally calculated using
the *annualized* std dev and return?
average(monthly return - tbill rate)
Sharpe = sqrt(12) * ------------------------------------
stdev(monthly return)
The sqrt(12) term annualizes the monthly results. So how is that
inferior to your "annualized std dev / annual return" measure?
Gary
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