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At 8:59 AM -0700 5/14/02, Chris Evans wrote:
>.. Does anyone know the algebra behind the calculation that says that you must multiply a monthly time series driven Sharpe ratio by Sq Rt 12 in order to annualize it??
Sharpe Ratio is defined using annualized values.
If you use logarithmic monthly return samples, then the monthly return would be multiplied by 12 to get the annualized return.
The monthly standard deviation is multiplied by the square root of 12 to get the annualized standard deviation. (Actually, the monthly variance is multiplied by 12 but the standard deviation is the square root of the variance.)
Sharpe = 12 * mo_return / (SQRT(12) * mo_standard_deviation) [for futures]
so
Sharpe = SQRT(12) * mo_return / mo_standard_deviation; [for futures]
If you are trading stocks or mutual funds that require using money to buy the positions, then you need to use the "excess return" (in excess of the risk-free rate) in the above equations.
Bob Fulks
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