04. Sharpe Ratio Demo

PRDTM2-786 AI Trading C3 L3 4 Sharpe Ratio DEMO Pt1 V2

Calculating the Sharpe Ratio for S&P 500 Futures

Learn the steps to calculate the Sharpe ratio using Python programming for better investment decision-making. Here's a streamlined guide to the process:

  • Setup

    • Ensure Python and the necessary libraries are installed, emphasizing the use of yfinance for data retrieval.

  • Data Collection

    • Retrieve S&P 500 futures data using the yfinance library.
    • Focus only on the adjusted close prices for accuracy in calculating returns.

  • Calculating Returns

    • Compute daily returns using percentage change of the daily prices.

  • Annualizing Metrics

    • Annualize daily returns by multiplying the average return by 252, representing trading days.
    • Determine annualized volatility by finding the standard deviation of daily returns and multiplying by the square root of 252.

  • Sharpe Ratio Calculation

    • Use the formula: Sharpe Ratio = (Annualized Return - Risk-Free Rate) / Annualized Volatility.
    • Default risk-free rate is based on a three-month Treasury bill rate.

This exercise demonstrates that while the Sharpe ratio aids in evaluating risk-adjusted returns, it's crucial to consider its limitations alongside other metrics for comprehensive investment appraisal.

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