Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

When evaluating the strategy ex-post using e.g. Sharpe ratio, what should one use as the risk-free rate? Let's suppose I am using a 1Y sample of weekly returns, sampled between 2012-01-01 and 2012-12-31. Should I use the 1Y risk-free rate as of 2012-01-01, an average of the 1W risk-free rates as of the beginning of each week in 2012, or subtract each 1W risk-free rate from the corresponding strategy return each week before averaging/calculating variance?

My intuition was to do the last, but on the other hand with the interest rates floating, this hardly makes it the "risk-free" option?

share|improve this question
add comment

1 Answer 1

seems to me that the rate used depends on the corresponding strategy's grip on funding: that is to say, if the strategy is self-financing, rf=0 when calculating sharpe (in the sense that your costs of funds is zero in construction of the strategy); if it requires an outlay at t_0, an amount which is tied up throughout the time frame of the year, rf should be the 1 yr zero rate as of t0; if the strategy is such that each week the outlay is returned and reinvested the following week, then the rf should be the geometric mean of the return on 1 week t-bills as of 2012-01-01 through 2012-12-31 at any rate see here: see here: http://www.edge-fund.com/Dowd00.pdf

share|improve this answer
add comment

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.