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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