Annualized Sharpe Ratios for ETF Returns in R

Summary

The document asks how to calculate a Sharpe ratio for a portfolio drawn from a large set of exchange-traded funds, after computing periodic returns and summary statistics in R. The proposed answer points to the PerformanceAnalytics package’s annualized Sharpe ratio function, with a specified risk-free rate, an annualization scale, and geometric return handling.

The response is a concise software-oriented pointer rather than a full portfolio calculation. It does not explain how the ETF return series should be combined into portfolio returns, whether the risk-free rate’s period matches the input data, or how missing observations and weighting are handled. The example’s annualization scale assumes a particular return frequency, so the user must set it to match the data before interpreting the result.

Key ideas

• The Sharpe ratio compares returns above a risk-free rate with return variability.
• An annualized calculation needs an annualization scale consistent with the return frequency.
• The suggested R function supports geometric annualization and accepts a risk-free rate.
• A collection of ETF return columns alone does not specify portfolio weights or a combined portfolio return series.

Tags

# Sharpe Ratio of ETFs in R


# Sharpe Ratio of ETFs in R












Suppose I want to calculate the Sharpe ratio given a risk free rate of 0.05 for a portfolio consisting of assets from 500 ETFs. How can I do so in R given the data I've collected thus far in my R code? The following is a part of my code:

```
#To extract ETF-prices for each column
prices <- data.frame(ETF=ETF,row.names = dates) 
head(prices)
# Function for calculating continous returns & log returns
returnscalc <- function(x){
  diff(x)/x[-length(x)]
}
returns <- apply(prices, 2, returnscalc)
head(returns)
# Function for calculating geometric mean
geomAveCalc <- function(x){
  (prod((1+x)))^(1/length(x))-1
}

weeklymean <- apply(returns, 2, geomAveCalc)
yearlymean <- matrix((1+weeklymean)^52-1)
yearlystd <-  sqrt (52 * apply(returns, 2, var))
yearlycov <- 52 * cov(returns)
```

where ETF is the data extracted from the .csv file containing the ETFs data.

Some help will be deeply appreciated.

## Answer by DataAdventurer (score 5, accepted)

https://quant.stackexchange.com/a/37033

try:

```
library(PerformanceAnalytics)
SharpeRatio.annualized(Returns, Rf = 0.05, scale = 252, geometric = TRUE)
```

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.