Best Way to Calculate Sharpe Ratio with Example

Best Way to Calculate Sharpe Ratio with Example. Sharpe Ratio is helpful in evaluating Mutual Funds Performance. Higher the Sharpe Ratio better is the fund.

Sharpe Ratio Formula = (Mean of Fund Returns – Risk-Free Return) / Standard Deviation

For calculating Sharpe Ratio follow these steps:

1. Decide Fund whose Sharpe Ratio you want to calculate
2. Find the NAV on First Day of the Month
3. Find the NAV on Last Day of the Month
4. Calculate Return by Formula i.e. (Return = (NAV on Last Day – NAV on First Day) / NAV on First Day)
5. Calculate Mean of the returns this will give us monthly return
6. To calculate annualized return multiple monthly return calculated in step 5 with 12.
7. Calculate Standard Deviation of the return
8. To calculate annualized Standard Deviation multiple it with 12.
9. Risk Free Return is assumed to be 8% (As bank is giving minimum 8% interest on Fixed Deposits this may change from time to time).
10. Put all the values calculated in the formula to get value of Sharpe Ratio

Example for calculating Sharpe Ratio:

SBI Magnum MidCap Fund.

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