Interpreting SOFR as an Annualized Risk-Free Rate

Summary

The document addresses how to use SOFR as the risk-free rate when calculating portfolio statistics such as the Sharpe ratio. The question arises from a multifactor portfolio project using weekly price data and asks whether a quoted SOFR value represents a daily, weekly, or monthly rate.

The reply provides one key clarification: SOFR is quoted as an annualized rate. The post does not explain how to convert that quote to a weekly period, how to align rate observations with return dates, or whether a particular SOFR convention is appropriate for the portfolio. Those implementation details therefore remain unresolved in the source.

Key ideas

• SOFR is quoted as an annualized rate.
• A rate used in a Sharpe ratio should match the return measurement period.
• The document does not specify a conversion method or timing convention for weekly data.

Tags

# how to use SOFR as risk free rate in portfolio construction


# how to use SOFR as risk free rate in portfolio construction












Good afternoof to everyone. I would like to create a portfolio following a multifactorial approach (I have been writing my master's thesis). As I would like to calculate a series of ratios (e.g. Sharpe ratio), I need a risk-free rate for the US market and I would like to use SOFR as an alternative to LIBOR. Now, I have downloaded the time series of the WEEKLY prices, how should I consider the SOFR? It is currently 0.09% but does it mean daily? Or is it yearly / monthly?

Thanks for your help!

## Answer by user42108 (score 1, accepted)

https://quant.stackexchange.com/a/59438

SOFR quote is annualized rate.

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