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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?

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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:

  1. Which markets do these funds cover? Fixed income, equity or mixed or other?
  2. 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.
  3. 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.

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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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  • 4
    $\begingroup$ If would be great if you'd add some content to your answer instead of just providing links. $\endgroup$ – LocalVolatility Feb 6 '18 at 7:53

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