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:
- Decide Fund whose Sharpe Ratio you want to calculate
- Find the NAV on First Day of the Month
- Find the NAV on Last Day of the Month
- Calculate Return by Formula i.e. (Return = (NAV on Last Day – NAV on First Day) / NAV on First Day)
- Calculate Mean of the returns this will give us monthly return
- To calculate annualized return multiple monthly return calculated in step 5 with 12.
- Calculate Standard Deviation of the return
- To calculate annualized Standard Deviation multiple it with 12.
- 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).
- 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 |
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