Validating the application of the formula of Information Ratio and Sharpe Ratio with an example

CFA General
#1

Hi, can I ask the help of esteemed forumers here to validate if the way I have applied the formula above are correct? To make the example more interesting, the calculation will be based on calculating the IR and SR of iShares Currency Hedged MSCI Australia (HAUD).

Thank you in advance!

HAUD calendar year return
2019: 23.95%
2018: -2.39%
2017: 10.03%
2016: 10.73%

Benchmark calendar year return
2019: 23.40%
2018: -2.84%
2017: 11.80%
2016: 11.80%

Assuming risk-free rate of 4% per annum (simplicity)

Calculating IR

Difference between HAUD and benchmark return (DIFF)
2019: 0.55%
2018: 0.45%
2017: -1.77%
2016: -1.07%

  1. Using Excel formula, =AVERAGE(DIFF) to get difference in average return of -0.46%
  2. Using Excel formula, =STDEV(DIFF) to get a tracking error of 1.15%
  3. IR = -0.46%/1.15% = -0.40

Calculating SR

Difference between HAUD and risk-free rate (DIFF2)
2019: 19.95%
2018: -6.39%
2017: 6.03%
2016: 6.73%

  1. Using Excel formula, =AVERAGE(DIFF2) to get expected portfolio return of 10.58%
  2. Using Excel formula, =STDEV(DIFF) to get a standard deviation of portfolio return of 10.76%
  3. SR = 10.58%/10.76% = 0.61
#2

No help from the kind forumers here? :wink:

#3

I suggest you to look at these two sources and compare with your examples.

SR

IR

By referring to those sources, I’m sure you’ll figure it all out.

#4

Thanks. I have actually gotten the template from the Corporate Finance Institute. Will check the youtube link. Thank you.