The text explains several limitations regarding the use of the sharpe ratio when evaluating funds. The first is time dependency. It says, for example, the sharpe ratio for a fund using quarterly returns, the analyst multiplies the quarterly return by 4…
My question: why not compound the quarterly return to find the annual return instead of multiplying? Is this specific when using sharpe ratio? Bc the rest of the text on hedge fund return says how they normally calculate simple holding period monthly returns and annualize by compounding so wondering why they multiply when finding annual returns as part of calculating sharpe ratio.
I guess this cuts back to Level I days, but when should you multiply to get annual return vs compounding? I thought you always compounded when annualizing…unless you have a bond but that’s different bc it’s a BEY.
Any help clarifying would be greatly appreciated! Thank you