I certainly agree with you re: the risk-free rate used in sharpe when comparing different strategies. But if one is using sharpe to compare different iterations of a strategy as it is being developed, it surely doesn’t matter which value is used.

I am glad to hear such a good news! It seems like your 9 months investment has grown really well ; )

Thanks for the sheet I see why we have got slight differences now.
For the annualized return, I was using a rolling geometric mean which is slightly different to the approach you are using.
Anyway thinking about the slippage I was wondering whether in this particular case, it was not reduced to a minimum since we would not put any limit to the buy order at the closing and a not limit sell at the opening (in its most simplistic approach)

About the risk free I am not entirely convinced because when one has to compute the sharpe ratio over a certain time period, say your annualized return in 200X was 10% but if for that year, the risk free rate was say 8% it is not the same as a 10% when the risk free is 2%. Of course in our countries with low inflation rates (for the last decade at least) this is not much of a problem but could well be in the future or if you have to transpose your sharpe ratio metric for other countries.
Just my 2cents thoughts

Many Thanks,
Didier

Thanks for your kindly comments. Sorry for the delay in responding, but I’ve been sidetracked by a happy family event – the birth of our first child!

I’ve updated the post to include an excel97-2003 copy of the workbook – hopefully it makes sense to you and isn’t too ridden with errors.

I consider this a “study” rather than a strategy – I’ve calculated no fees, comm.s or slippage in this sample. Within StratBox I provide a variety of ways to deal with these factors and I touched on the issue a bit in my May 6th post (”quantifying friction”), but will revisit it again in the coming weeks as it’s an interesting and important part of the puzzle. I also should be able to quantify what I’ve actually been slipping on some of my production strats for illustrative purposes.

For the risk-free rate, I used 5% in this workbook, but that value can be adjusted. For studies like this, I really don’t think it matters much and will use a random value from 0-5% depending on mood, position of planets etc. For a bank it makes sense to use the appropriate interbank rate (eg, libor) and for a retail investor it probably makes sense to use the rate your broker pays you on deposits, a cd rate or something similar. For its use in characterizing a risk-adjusted measure of returns, I don’t think it really matters at all.

Best regards

I have been reading your blog and even though I am not part of the financial market world at all, it has been very interesting!

Trying to recompute your figures I came up with a slightly lower return for the SPY (with 10.64% annualized return at the end of 17/07/2008) while near exactly the same volatility (which I computed using the log return method).
I did it on the bel20 index (belgian index) and came up with the same results with a 10.79% annualized return and a 8.94% volatility

I am just wondering what’s the impact of the fees on the return do you have a rule of thumb?

Another question: which fixed income rate did you use to compute the sharpe? I used the 6 months CD rate but I don’t now whether it is too cautious or not?

And last but not least, would it be possible to have an excel 2000 compatible version of the file?

Thanks,
Didier