How Precision of the Sharpe Ratio Improves With Monthly Data
42 Pages Posted: 27 Apr 2017 Last revised: 24 Jan 2018
Date Written: January 21, 2018
Practitioners often estimate the Sharpe ratio using annualized monthly data. This paper demonstrates how the bias and precision of the Sharpe improves with monthly versus annual data. I provide small-sample and large-sample formulae for the distribution, highlighting the distinction between the annual and annualized monthly estimators. With more than two years of monthly data the large-sample distributions generally provide a good approximation, simplifying the calculation of confidence intervals; this applies for both normal and non-normal returns. Although these results apply to iid returns they are of practical use, since independence for monthly returns is a good description for many financial assets.
Keywords: Sharpe, Sharpe Ratio, sampling distribution, non-central Student-t, small-sample distribution, large-sample distribution, asymptotic distribution, confidence interval
JEL Classification: G10, G11
Suggested Citation: Suggested Citation