Saturday, December 19, 2009

Reviewing risk measurements on portfolios, Update: Released EzBacktest 0.9.3

Update: Sharpe and standard deviation added to EzBacktest, released today at version 0.9.3
Original Message:
While adding the risk measurement feature to EzBacktest, I'm reviewing several risk measurements and samples. If anyone has an opinion, please leave a comment:

Investopedia: Modern Portfolio Theory Stats Primer, Also: Measure Your Portfolio's Performance

Some blog: Calculate Your Own Portfolio’s Standard Deviation

Wikipidia: Sharpe ratio

Another blog, with an excel sheet: Risk Adjusted Return - Sharpe Ratio using MS excel sheet free

OK, so here's where things stand: I'm a bit confused. Generally - you'd calculate the standard deviation using years of sample data - however, you might only be presented with 1, 2 years or just months worth of data. The excel sample uses annualized std of monthly returns - which I ran through code - and it isn't the same as yearly. Also, some document the expected ratio as calculated from AVERAGE yearly returns, others from ANNUALIZED yearly returns. And I need to add that ANNUALIZED MONTHLY AVERAGE returns are simply completely different.

So there you have it, the feature is nearly complete - but I'm left with some statistical doubt regarding the results.



  1. Annualized standard deviation would be approximated by multiplying the monthly standard deviation by the square root of twelve. Morningstar uses this method.

    Have a look at the calculator at and compare your results with theirs (using DFA funds).

  2. Check this post out