Hi useRs, I am trying to calculate the Sharpe ratio with "sharpe" of the library "tseries".
The documentation requires the univariate time series to be a portfolio's cumulated returns. In this case, the example given data(EuStockMarkets) dax <- log(EuStockMarkets[,"FTSE"]) is however not the cumulated returns but rather the daily returns of the FTSE stock index. Is this way of calculating the Sharpe ratio correct? Here are my own data: year Index PercentReturns 1985 117 0.091 1986 129.9 0.11 1987 149.9 0.154 1988 184.8 0.233 1989 223.1 0.208 1990 223.2 0 1991 220.5 -0.012 1992 208.1 -0.056 1993 202.1 -0.029 1994 203.1 0.005 1995 199.6 -0.017 1996 208.6 0.045 1997 221.7 0.063 1998 233.7 0.054 1999 250.5 0.072 2000 275.1 0.098 2001 298.6 0.085 2002 350.6 0.174 2003 429.1 0.224 2004 507.6 0.183 2005 536.6 0.057 2006 581.3 0.083 I calculated the Sharpe ratio in two different ways: (1) using natural logs as approximation of % returns, using "sharpe" of "tseries". (2) using the % returns using a variation the "sharpe" function. In both cases I used the risk free rate r=0 and scale=1 since I am using annual data already. My results: METHOD 1: "sharpe": > index <- log(Index) > sharpe(index, scale=1) [1] 0.9614212 METHOD 2: my own %-based formula: > mysharp function(x, r=0, scale=sqrt(250)) { if (NCOL(x) > 1) stop("x is not a vector or univariate time series") if (any(is.na(x))) stop("NAs in x") if (NROW(x) ==1) return(NA) else{ return(scale * (mean(x) - r)/sd(x)) } } > mysharp(PercentReturns, scale=1) [1] 0.982531 Both Sharp ratios differ only slightly since logs approximate percentage changes (returns). Are both methods correct, esp. since I am NOT using cumulated returns as the manual says? If cumulated returns were supposed to be used, could I cumulate the %-returns with "cumsum(PercentReturns)"? Many thanks in advance! Bernd ______________________________________________ R-help@stat.math.ethz.ch mailing list https://stat.ethz.ch/mailman/listinfo/r-help PLEASE do read the posting guide http://www.R-project.org/posting-guide.html and provide commented, minimal, self-contained, reproducible code.