So I understand that the Sharpe Ratio
is defined as (rate of portfolio return - risk free rate) / portfolio standard deviation. I'm just not quite sure on how to compute each of the inputs. Let's assume I have a data set spanning 5 years in cells A1:A1260:
Rate of Return
: Would this be (A1260/A1 - 1) / 5?
Risk Free Rate
: This one I have no idea. I know I'm supposed to use a risk free rate like LIBOR of returns on a US Treasury but do I just pick the most recent risk free rate? If I do that then essentially for a portfolio that had the exact same returns and standard deviation would have a different Sharpe in 2005 than today.
Portfolio Standard Deviation
is this simply stdev(A1:A1260)?
Many thanks for the help. Much appreciated.