# Best Way to Calculate Sharpe Ratio with Example

Sharpe Ratio is helpful in evaluating Mutual Funds Performance. Higher the Sharpe Ratio better is the fund.

Sharpe Ratio Formula = (Mean of Fund Returns – Risk Free Return) / Standard Deviation

For calculating Sharpe Ratio follow these steps:

1. Decide Fund whose Sharpe Ratio you want to calculate
2. Find the NAV on First Day of the Month
3. Find the NAV on Last Day of the Month
4. Calculate Return by Formula i.e. (Return = (NAV on Last Day – NAV on First Day) / NAV on First Day)
5. Calculate Mean of the returns this will give us monthly return
6. To calculate annualized return multiple monthly return calculated in step 5 with 12.
7. Calculate Standard Deviation of the return
8. To calculate annualized Standard Deviation multiple it with 12.
9. Risk Free Return is assumed to be 8% (As bank is giving minimum 8% interest on Fixed Deposits this may change from time to time).
10. Put all the values calculated in the formula to get value of Sharpe Ratio

Example for calculating Sharpe Ratio:

SBI Magnum MidCap Fund.

 Month NAV on First Day of the Month NAV on Last Day of the Month Return A B = (B-A)/A January 2011 25.24 22.2 -0.12044 February 2011 21.85 20.45 -0.06407 March 2011 21.07 22.76 0.080209 April 2011 22.76 22.74 -0.00088 May 2011 22.49 22.42 -0.00311 June 2011 22.5 22.43 -0.00311 July 2011 22.84 23.22 0.016637 August 2011 23.2 21.63 -0.06767 September 2011 21.76 20.86 -0.04136 October 2011 20.62 21.56 0.045587 November 2011 21.51 19.62 -0.08787 December 2011 19.73 18.59 -0.05778

 Average Monthly Return -0.02532 Annualized Returns -0.30387 Standard Deviation 0.058056 Annualized Standard Deviation 0.20111 Risk Free Rate of Return 0.08 Sharpe Ratio -1.90872