# Calculate Daily Returns for Sharpe Ratio

For the purposes of Sharpe ratio, I calculate a trading strategy's daily returns using realized P/L only: $$\frac{K(t + 1) - K(t)}{K(t)},$$ where $K(t)$ is the cash balance after market close on day $t$. Assume no transfer is made from or to the account.

Recently, someone suggested I use account balance(cash balance + market value of all positions) instead, to include the day's unrealized P/L.

Which one should I use?

For a single day as long as $K(t+1)$ includes the intraday cash flows it is the same, however if you do not simulate your cash balance interest rate you forget that your cash get compounded over time, which is slightly incorrect.