tobeornottobe

Hmmmm, is that really the case?

At a minimum, you wouldn't want to subtract the average 10-year bond yield. Presumably, you would want to subtract the total return on an investment that regularly rolled over 10-year bonds. You're only accounting for the yield return and not the duration impact.

Further, if you're benchmarking yourself against a 10-year Treasury, you'd want to incorporate it in the standard deviation so it's more like an information ratio. The Sharpe ratio doesn't incorporate the risk-free rate in the standard deviation because it presumably has a 0 standard deviation.

The reason a T-bill at the short end is because there is essentially no duration and it is almost certainly risk-free over that horizon.

I sort of see your point, in that if you invest for ten years, you could have purchased a 10 year bond on day 1 and went to sleep and woke up ten years later and that's your risk-free return. The 90-day rate has reinvestment risk. However, that's not the same thing as the average 10-year bond yield over that period. Further, it would only work if you have bootstrapped the yield curve at inception, found the zero coupon yield over the period where you want to evaluate the Sharpe ratio, and use that. If you're horizon is 10+ years, there are fewer points to bootstrap and your zero coupon yield would have some estimation error.