Talk:Sharpe ratio

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This is misleading, as one actually wants mean and stdev of excess returns, which means the subtraction of risk free comparators should be inside the operators.

Good catch, I had never looked that closely into the definition, but I just checked the paper that is the external link and it confirms you are correct. There may be a clearer way to word that than I did, so feel free to fix it if you can. - Taxman ^Talk 21:43, 15 February 2006 (UTC)

Actually it is not a good catch. The current formula is equivalent to the previous formula within the usual assumptions

<V> - C == <V - C>, where V is some value, and C is a constant

--Gene s 05:58, 16 February 2006 (UTC)

The return on benchmark asset is not necessary a constant, i.e. the benchmark asset may or may not be risk free. The catch was good, making the formula more general..

[edit] some topics that confuse

1) many database entities use the geometric return when it should be the average...which leads to 2) If you have 10,20, or 30 years of data, why would you annualize the monthly numbers. Nobody has talked about what the appropriate number of completed years of performance that is necessary to average for return, and calculate the standard deviation on rather than using monthly numbers. Finally, is it not imperitive to use the geometric historical (equal to length of complete years of returns) tbill rate instead of the current rate? For very very low geometric rates of return, the sharpe ratio can become negative when it should be positive. For example, currently databases are using 5% as the RF rate. However, over the last 13 years it has averaged below 4%. If you are evaluating a return stream that has earned 4.8% then historically, you have outperformed the risk free rate but the sharpe would be negative. How can we accept the use of the current rate when it distortes history. —The preceding unsigned comment was added by 216.47.169.143 (talk) 19:44, 19 March 2007 (UTC).

[edit] from the horses mouth

http://www.stanford.edu/~wfsharpe/art/sr/sr.htm —The preceding unsigned comment was added by 216.47.169.143 (talk) 18:18, 27 March 2007 (UTC).