SharpeRatio: calculate a traditional or modified Sharpe Ratio of Return...

In PerformanceAnalytics: Econometric Tools for Performance and Risk Analysis

Description

The Sharpe ratio is simply the return per unit of risk (represented by variability). In the classic case, the unit of risk is the standard deviation of the returns.

Usage

SharpeRatio(
  R,
  Rf = 0,
  p = 0.95,
  FUN = c("StdDev", "VaR", "ES"),
  weights = NULL,
  annualize = FALSE,
  SE = FALSE,
  SE.control = NULL,
  ...
)

SharpeRatio.modified(
  R,
  Rf = 0,
  p = 0.95,
  FUN = c("StdDev", "VaR", "ES"),
  weights = NULL,
  ...
)

Arguments

R	an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
Rf	risk free rate, in same period as your returns
p	confidence level for calculation, default p=.95
FUN	one of "StdDev" or "VaR" or "ES" to use as the denominator
weights	portfolio weighting vector, default NULL, see Details in VaR
annualize	if TRUE, annualize the measure, default FALSE
SE	TRUE/FALSE whether to ouput the standard errors of the estimates of the risk measures, default FALSE.
SE.control	Control parameters for the computation of standard errors. Should be done using the RPESE.control function.
...	any other passthru parameters to the VaR or ES functions

Details

\frac{\overline{(R_{a}-R_{f})}}{√{σ_{(R_{a}-R_{f})}}}

William Sharpe now recommends InformationRatio preferentially to the original Sharpe Ratio.

The higher the Sharpe ratio, the better the combined performance of "risk" and return.

As noted, the traditional Sharpe Ratio is a risk-adjusted measure of return that uses standard deviation to represent risk.

A number of papers now recommend using a "modified Sharpe" ratio using a Modified Cornish-Fisher VaR or CVaR/Expected Shortfall as the measure of Risk.

We have recently extended this concept to create multivariate modified Sharpe-like Ratios for standard deviation, Gaussian VaR, modified VaR, Gaussian Expected Shortfall, and modified Expected Shortfall. See VaR and ES. You can pass additional arguments to VaR and ES via ... The most important is probably the 'method' argument/

This function returns a traditional or modified Sharpe ratio for the same periodicity of the data being input (e.g., monthly data -> monthly SR)

Author(s)

Brian G. Peterson

References

Sharpe, W.F. The Sharpe Ratio,Journal of Portfolio Management,Fall 1994, 49-58.

Laurent Favre and Jose-Antonio Galeano. Mean-Modified Value-at-Risk Optimization with Hedge Funds. Journal of Alternative Investment, Fall 2002, v 5.

See Also

SharpeRatio.annualized
InformationRatio
TrackingError
ActivePremium
SortinoRatio
VaR
ES

Examples

data(managers)
SharpeRatio(managers[,1,drop=FALSE], Rf=.035/12, FUN="StdDev") 
SharpeRatio(managers[,1,drop=FALSE], Rf = managers[,10,drop=FALSE], FUN="StdDev")
SharpeRatio(managers[,1:6], Rf=.035/12, FUN="StdDev") 
SharpeRatio(managers[,1:6], Rf = managers[,10,drop=FALSE], FUN="StdDev")



data(edhec)
SharpeRatio(edhec[, 6, drop = FALSE], FUN="VaR")
SharpeRatio(edhec[, 6, drop = FALSE], Rf = .04/12, FUN="VaR")
SharpeRatio(edhec[, 6, drop = FALSE], Rf = .04/12, FUN="VaR" , method="gaussian")
SharpeRatio(edhec[, 6, drop = FALSE], FUN="ES")

# and all the methods
SharpeRatio(managers[,1:9], Rf = managers[,10,drop=FALSE])
SharpeRatio(edhec,Rf = .04/12)

PerformanceAnalytics documentation built on Feb. 6, 2020, 5:11 p.m.