Best Way to Calculate Sharpe Ratio with Example

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
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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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