In calculating an annualized Sharpe ratio using monthly returns, what is commonly used as the value for the risk free rate? I am using this formula:
excess return = monthly returns - risk free rate Sharpe ratio = (average(excess returns) / std(excess returns)) * sqrt(12)
Multiplying by the sqrt(12) in order to make the result annual.
My understanding is that a common yearly risk free rate is roughly equal to 5%, is this true? Would the monthly risk free rate then be equal to 5% / 12 or .4167%?
Secondary question, if you are dealing with more than one year of monthly returns, such as 2 or 3 years, would you still multiply by the sqrt(12), or would it be for:
2 years = multiply by sqrt(24) 3 years = multiply by sqrt(36)
and so on?