TROUBLESHOOTING THE SHARPE RATIO ON THE PERFORMANCE ANALYSIS REPORT

Transcription

1 TROUBLESHOOTING THE SHARPE RATIO ON THE PERFORMANCE ANALYSIS REPORT To best troubleshoot Sharpe Ratio, you must first understand the calculation. The Sharpe Ratio calculation is only displayed on the Performance Analysis report. The Sharpe Ratio, is a measure of risk-adjusted return, showing the excess return per unit of total risk. INFORMATION NEEDED FOR THE SHARPE RATIO CALCULATION Two main pieces of data is needed to calculate the Sharpe Ratio: 12 Monthly or Quarterly intervals for the portfolio or asset class It is preferable to have 36 uniform time period observations (intervals) to calculate a statistically accurate Beta, although PortfolioCenter calculates it with as few as 12. Important All intervals must be the same length. For example, 12 monthly intervals or 12 quarterly intervals, but not 6 monthly intervals and 6 quarterly intervals. However, 6 quarterly intervals and 18 monthly can be used. By combining the 18 monthly intervals to create 6 quarterly intervals, you have a total of 12 quarterly intervals. A specified risk-free index You must have an index entered in the risk-free index field in the general performance settings. The standard measure of the risk-free index is the 3 Month Treasury Bill Yield. However, the system accepts any index you enter. DocumentID: SPT Last Updated: September 13, 2012

2 TROUBLESHOOTING THE SHARPE RATIO Most likely, you are either seeing two dots (..) instead of a calculation or the calculation seems incorrect. The sections below show you how to troubleshoot each situation. FOR TWO DOTS (..) INSTEAD OF A SHARPE RATIO Generally, two dots (..) instead of a Sharpe ratio means PortfolioCenter was confused about the information or something was missing. Usually, two dots can be attributed to a Missing risk-free index Report dates are not correct missing or overlapping portfolio or asset class interval missing or overlapping risk-free index data The best course of action is to 1. Make sure you have entered a risk-free index in the General Performance settings in PortfolioCenter 2. Check the report settings to make sure you have the appropriate dates 3. Review the Portfolio Interval Audit or Asset Class Interval Audit report to find any missing intervals or interval gaps for the period 4. Review the Index Performance History to verify the risk-free index has returns for the entire period CHECK FOR THE RISK-FREE INDEX First, make sure you have set a risk-free index in the General Performance settings. Usually, the standard measure of the risk-free index is the 3 Month Treasury Bill Yield. Tip If you do not have an appropriate risk-free index, the alpha calculation might be skewed. It is best to have an appropriate risk-free index for the most accurate calculation. If you do not already have one in PortfolioCenter, you will need to add a risk-free index. For more information about adding index information, see Importing Index Returns from Investment View. Troubleshooting the Sharpe Ratio on the Performance Analysis Report Page 2 of 8

3 1 From the main portfolios tab, go to Settings General Performance 2 In the General Performance Settings, review the information in the Risk-Free Index field. If it is blank, add an appropriate risk-free index. If the field has an index, make a note of the index you might have to troubleshoot the returns later. CHECK REPORT SETTINGS Next, check the report settings to ensure you are reporting for the correct reporting periods and all information needed for the calculation is included: 1 From the main portfolios tab, select the portfolio you want to troubleshoot. 2 Click the Reports button at the bottom of the window. 3 Click the Performance Reports button on the left. 4 Select Performance Analysis from the list of reports 5 Click the Settings button. 6 First, check the date ranges for each period you intend to report. Make sure that for each period you have: The Print box is checked for each period At least 12 months between the Start and Finish dates In the example on the right, period 1 is only reporting for six months. 7 Make appropriate changes to the settings, if necessary. 8 Click OK to save the settings. 9 Run the Report. If you are still seeing two dots (..) for the Sharpe Ratio, or the settings were all correct, continue to the Review Intervals section. Troubleshooting the Sharpe Ratio on the Performance Analysis Report Page 3 of 8

4 REVIEW INTERVALS Next, review the Portfolio Interval Audit or Asset Class Interval Audit to look for missing or overlapping interval periods. Note The steps below are for the Portfolio Interval Audit. The Portfolio Interval Audit and Asset Class Interval Audit are similar reports. However, for setting screenshots and specific information about the Asset Class Interval Audit, see Troubleshooting Two Dots for an Asset Class TWR on Portfolio Performance Reports. 1 From the Portfolios tab, select the portfolio you want to troubleshoot and click the Reports button. 2 In the reports window, click the Interval Detail Reports button on the left. 3 Select the Portfolio Interval Audit report from the list. 4 Click the Settings button. 5 Enter the From Date and To Date. The From Date should be the beginning date of the period you want to troubleshoot. In the example above, the From Date should be 6/30/06. The To Date should be the ending date of the period you want to troubleshoot. In the example above, the To Date should be 6/30/07. 6 Click OK to save the settings. 7 Click Run Report to see the report. Troubleshooting the Sharpe Ratio on the Performance Analysis Report Page 4 of 8

5 REVIEW INDEX DATA Another potential issue is the risk-free index data is missing values or return periods. Run the Index Performance History in the Global Reports section to look for two dots for the risk-free index. 1 Click the Global Reports tab. 2 In the Global Performance Reports section, select Index Performance History, as shown in the example to the right. 3 Click the Settings button. 4 In the Report settings dialog, enter the From Date and To Date. The From Date should be the same as the beginning date on the performance report and the To Date should be the same as the ending date on the performance report. Leave the Reporting Frequency setting at Monthly. 5 For the Index 1 Index 10 settings, select the index you want to troubleshoot. 6 Click OK to save the settings. 7 Click Run Report to see the report. 8 On the Index Performance History report, look for: One or more periods with two dots (..) for each index. One or more periods with skewed or inflated returns for each index. 9 Print and close the Index Performance History Report. Note See Troubleshooting Two Dots for an Index Return on Performance Reports for more information about correcting the index data if you discover a missing or overlapping index period. Troubleshooting the Sharpe Ratio on the Performance Analysis Report Page 5 of 8

6 FOR AN INCORRECT SHARPE RATIO The Sharpe Ratio is calculated based on the TWR calculation and Index returns. Generally, if the TWR or index is incorrect, the Sharpe Ratio is also affected. Using the example on the right, the Performance Analysis report is displaying an alpha you think is incorrect for the Since Inception period. The best course of action is to review the : 1. Risk-free index to look for an incorrectly specified risk-free index or a period that is skewed 2. Intervals to look for one or more periods with an incorrect interval 3. Index or target to look for one or more periods with an incorrect return for the period REVIEW THE RISK-FREE INDEX First, look for the risk free index to make sure you have specified the correct risk-free index. 1 From the main portfolios tab, go to Settings General Performance 2 In the General Performance Settings, review the information in the risk-free field. Usually, an index like the 3 Month Treasury Bill Yield is an appropriate riskfree index. If it contains an index that is not an appropriate risk-free measurement, replace the selected index with a more appropriate risk-free index. If the field has an appropriate risk-free index, make a note of the index you might have to troubleshoot the returns later. REVIEW INTERVALS First, run either the Portfolio Interval Audit or the Asset Class Interval Audit reports to validate the returns for the period. Note The steps below are for the Portfolio Interval Audit. The Portfolio Interval Audit and Asset Class Interval Audit are similar reports. However, for setting screenshots and specific information about the Asset Class Interval Audit, see Troubleshooting Two Dots for an Asset Class TWR on Portfolio Performance Reports. Troubleshooting the Sharpe Ratio on the Performance Analysis Report Page 6 of 8

7 1 From the Portfolios tab, select the portfolio you want to troubleshoot and click the Reports button. 2 In the reports window, click the Interval Detail Reports button on the left. 3 Select the Portfolio Interval Audit report from the list. 4 Click the Settings button. 5 Enter the From Date and To Date. The From Date should be the beginning date of the period you want to troubleshoot. In the example above, the From Date should be 6/30/06. The To Date should be the ending date of the period you want to troubleshoot. In the example above, the To Date should be 6/30/07. 6 Click OK to save the settings. 7 Click Run Report to see the report. Look for periods that seem to have incorrect TWR. REVIEW INDEX DATA Another potential issue is that the risk-free index data is incorrect for the reporting periods. Run the Index Performance History report to determine if the returns for the period seem correct: 1 Click the Global Reports tab. 2 In the Global Performance Reports section, select Index Performance History, as shown in the example to the right. 3 Click the Settings button. Troubleshooting the Sharpe Ratio on the Performance Analysis Report Page 7 of 8

8 4 In the Report settings dialog, enter the From Date and To Date. The From Date should be the same as the beginning date on the performance report and the To Date should be the same as the ending date on the performance report. Leave the Reporting Frequency setting at Monthly. 5 For the Index 1 Index 10 settings, select the index you want to troubleshoot. 6 Click OK to save the settings. 7 Click Run Report to see the report. 8 On the Index Performance History report, look for: One or more periods with two dots (..) for each index. One or more periods with skewed or inflated returns for each index. 9 Print and close the Index Performance History Report. Note See Troubleshooting an Incorrect Index Return for additional information about troubleshooting and correcting index information. PortfolioCenter is a product of Schwab Performance Technologies ( SPT ). SPT is a subsidiary of The Charles Schwab Corporation separate from its affiliate Charles Schwab & Co., Inc. ( CS&Co ). CS&Co is a registered broker-dealer that provides brokerage services, while SPT licenses software and provides related technology products and services Schwab Performance Technologies ( SPT ). All rights reserved. Troubleshooting the Sharpe Ratio on the Performance Analysis Report Page 8 of 8