Converting Annual Bond Yields into a Daily Sharpe Risk-Free Rate

Summary

The discussion explains how to use daily observations of Switzerland’s 10-year government bond yield when calculating a portfolio Sharpe ratio. To represent the rate for a calendar year, average the yield observations from that year; the answer treats the result as an annual interest rate. The bond’s 10-year maturity does not mean its quoted yield should be divided by ten.

For a daily Sharpe calculation, the risk-free rate and portfolio return need to use matching time intervals, so the annual rate must be converted to a daily rate before subtracting it from each daily portfolio return. The document raises this conversion question but does not specify the convention for annual-to-daily conversion, compounding, or the precise Sharpe calculation. Its answer focuses on interpreting the quoted yield and selecting the annual figure, so further assumptions may be needed for a consistent implementation.

Key ideas

• Average the yield observations for the year to estimate that year’s annual rate.
• A 10-year bond’s quoted yield is annualized; its maturity does not call for dividing the yield by ten.
• Match the risk-free rate’s time interval to the portfolio return interval in a Sharpe calculation.

Tags

# Sharpe Ratio - How do I calculate my risk free rate from daily yield data?


# Sharpe Ratio - How do I calculate my risk free rate from daily yield data?












I am trying to compute a Sharpe ratio for a portfolio spanning over 20 years. I have daily data for the portfolio, as well as the yield of CH10Yr (10 year bond in Switzerland, downloaded from Thomson Reuters).

The latter looks like this :

If I want to compute the risk free rate for, say 2016, do I compute the average yield of 2016 and then divide by 252 (since it is daily data)? Or do I have to divide by 10, because it's the 10 year bond? And then for the Sharpe ratio, is it correct to take out the above-computed daily risk free rate from the portfolio daily return (and then divide it by std)?

Thanks for the help.

PS: I'm relatively new, if something is unclear, please tell me. I will do my best to clarify it.

## Answer by SmurfAcco (score 1, accepted)

https://quant.stackexchange.com/a/45323

If you want the representing interest rate for 2016, you simply calculate the average of the values from the corresponding year. The result is your interest rate per annum. There is no need to divide it by 10, since the notation for CH10 bonds is also per year and not per every 10 year.

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