Diagnosing Unexpectedly Positive Sharpe Ratios Across Funds
Summary
The document describes a researcher calculating monthly Sharpe ratios for a large set of mutual funds over a ten-year sample and finding that every result is positive. The stated calculation takes each fund’s average monthly excess return and divides it by the standard deviation of returns. The response notes that because volatility is positive, the sign of the ratio follows the sign of average excess return; the pattern therefore calls for examining the return inputs and fund context rather than assuming the formula is wrong.
Suggested checks include identifying the funds’ asset classes and markets, verifying that the chosen risk-free rate is appropriate for their currencies and regions, and confirming how that rate’s return is measured. The document does not settle whether the calculations are correct, since it provides no fund details, return series, or risk-free-rate specification. It offers diagnostic questions rather than a complete spreadsheet procedure, and does not discuss annualizing monthly Sharpe ratios or alternative conventions.
Key ideas
- The Sharpe ratio’s sign follows the average excess return when volatility is positive.
- A broad set of positive ratios warrants checking the underlying returns and assumptions.
- The risk-free rate should fit the funds’ currency and market context.
- The method used to measure risk-free performance can affect excess returns.
- The document lacks enough data to determine whether the reported ratios are correct.
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Full text
# Calculating 10-year Sharpe ratio for a mutual fund in excel? # Calculating 10-year Sharpe ratio for a mutual fund in excel? Probably a very simple question but here goes. I am looking to calculate the Sharpe ratio for some funds in excel (173 funds to be exact). The monthly returns I have are from January 2006 to December 2015 inclusive. This 10-year period is the period of interest in my dissertation that I am currently completing. I have found the excess returns (returns - riskfree rate) for every month of every fund. I then found the average of the excess returns over the 10-year period for each fund, then divided by the standard deviation of the returns over the 10-year period for each fund. All 173 funds display a positive Sharpe ratio, however, which seems inaccurate. Have I done something wrong here? ## Answer by Richi Wa (score 1) https://quant.stackexchange.com/a/40178 So you have calclulated the Sharpe-ratio (SR) for 100+ funds and find it suprising that the SR is positiv for so many. SR compares excess return to risk. As risk is always positive we can focus on excess return to analyze why so many of your funds have positive SR. To analyze this you have to go much more into detail: - Which markets do these funds cover? Fixed income, equity or mixed or other? - Which risk-free rate do you use for the funds? If you use a USD money market rate then this could be found inaccurate for European funds and so on. - How do you calculate the return of the risk free rate? There are money-market indices and you could use the performance of these as the risk free return. So, as a start you should give as the details about the funds and the risk-free rates that you use. ## Answer by Rajesh C (score 0) https://quant.stackexchange.com/a/38086 Have a look at the following YouTube videos - I feel you should be able to get your solution with the help of these... https://www.youtube.com/watch?v=7wOsbgz8r40 https://www.youtube.com/watch?v=Ejz30ETOyjo Hope this Helps.
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