How to calculate Annualized Sharpe Ratio from Daily Returns

Discussion in 'Risk Management' started by trader99, Dec 15, 2009.

  1. trader99


    OK. Here's the deal. I want to calculate an ANNUALIZED Sharpe Ratio from my daily P&L.

    Here's how I went about it. Please let me know if you think this is correct. I read it on the internet somewhere but it still feels a bit icky(the formula & calculations). Just wanted a sounding board/confirmation if this the correct approach.

    1) Daily P&L series

    2) Calculate Daily Returns(Today's PL/Yesterday's PL -1) as a percentage. Note: PL is actually account balance.

    3) Take Average of the Daily Returns

    4) Take Std deviation of Daily Returns

    5) Average Daily Returns - 25basis pts(for Fed Funds rate which is the risk-free rate for daily return series right?)

    6) Divide #5 by #4

    7) Take #5 multiples by the square root of 252 to annualize it.

    What ya think? I found this somewhere but I feel like it's a bit icky.

    Also, how can I calculate my YTD Return when I WITHDRAW from my trading account?? You can't just use the current balance % from the beginning balance. Since the balance went up then I withdraw from my trading acccount to bank some.

    Thanks in advance!