Monday, July 23, 2012

Calculating Sharpe Ratio and Information Ratio in R

Sharpe Ratio and Information Ratio measure excess returns of an investment manger, fund or strategy in relation either to risk free interest rate or some benchmark (for example such as market index), in the context of their variability (which - partly - reflects their risk).

Fig. Example: some return vs. benchmark return

There is at least one R package already available - PerformanceAnalytics - which provides both Sharpe Ratio and Information Ratio, 

Hence I've written my own simple implementation of these functions. 

You can use these ratios together with drawdown calculations as a basic risk management tools.

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