I have a quarterly return in quarter i for an asset which is typically held for 10 years. Which maturity Treasury yield should I use as a risk free rate in this context, and from what period? I initially think quarter i-1, but that thinking may be flawed.
My thinking is I use the 10Y Treasury yield and divide by 4 to make quarterly. I’ve also been told to use the 3M Treasury yield as it’s most often used in literature.
There are mixed answers out there, so I’m hoping to answer this. Typically I’m reading one should use a Treasury yield as a proxy for the RFR with maturity roughly equal to the typical holding period of the asset, but others have different answers. Also getting different answers about whether to use Treasury yield from same quarter, or previous quarter, as RFR rate for quarterly return in quarter i.
Edit: I’ll be using the resulting excess returns for an arithmetic Sharpe ratio (simple excess returns then Sharpe ratio scaled by sqrt(4)) so I am effectively ignoring the effects of compounding for the sake of using the formal Sharpe ratio.