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|
|Average Monthly Return||-0.02532|
|Annualized Standard Deviation||0.20111|
|Risk Free Rate of Return||0.08|
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