strikethree

whether you do annual return as a geometric mean of monthly returns or as an arithmetic mean of returns - you are not going to have returns going too far off from each other.

however std dev of returns (denominator) would change.

I think that is the point of this entire statement.

-- need to be consistent in the period used.
-- do not try to forecast a bigger period's std. dev from a smaller period's. (once you did that - you would have a lower std. deviation on the bigger period).
-- and then use that new lower std. deviation in the sharpe ratio - your sharpe ratio would be overstated.

CP

IAmNeil

Correction to my previous message.

I think statement 1 shall mean that ASD from DAILY (rather than ASD from weekly return or monthly return) which shall be HIGHEST and shall be used in calculation of Sharpe Ratio (especially, for hedge funds, since monthly returns are reported).

PalacioHill

Following are fundamental issues : In calculation of Sharpe Ratio,

1. Statement 1
Why ASD (Annualized Standard Deviation) of daily returns is generally higher than the weeky, which is, in turn, higher than the monthly ?

I don't have answer but I think statement 1 shall mean that ASD from monthly return (rather than ASD from weely return or daily return) which shall be lowest and shall be used in calculation of Sharpe Ratio (especially, for hedge funds, since monthly returns are reported).

2. Statement 2
What is the correct way to calculate the ARR (Annualized Rate of Return), given monthly
or weekly or daily rate of retun ?

I am sorry it seems I missed something because I don't remember where this is stated formally in the curriculum. But it seems the "correct way" shall be : {[(1+r month1)* (1+r Month 2) * ...(1+r month 12)]^1/12 -1} x12 when monthly rate of retun is given.

Please refer to P.89~90 in this reading and EOC Q12B. In these 2 cases, the ARR calculated from : (1+r month1)* (1+r Month 2) * ...1+r month 12) -1 are higher than those calculated by the "correct way" and this shall be a means to gaming.

As for SD, I think basically no way to compound the SD from the monthly return and ASD = MSD x ^12 shall be used when monthly rate of retun is given. (MSD : Monthly SD)

Any further response is appreciated !