Course Name: Price Action Trading Strategies Using Python, Section No: 8, Unit No: 5, Unit type: Notebook
Why are we dividing by 252 the 2% of risk-free asset?
30XvD7e.png (1081×187) (imgur.com)
Is because we're using the mean returns of the strategy?
Hi Daniel,
Here we are assuming that the risk-free asset's return is 2% per year. But we divide it by 'n' so we can get the number in terms of the number of trading candles in a day. If n =1, then it means that we are taking the daily risk-free rate.
I hope this helps.
Thanks.
So if I'm calculating the Sharpe Ratio of my trading strategy and I want to use a risk-free asset return of 2%, even if the mean returns of my strategies are in daily period, should I use 0.02/252 instead of 0.02 in the formula?
Hello Daniel,
Yes, you should adjust the risk-free rate to match the period of your return calculations. Since you are using daily returns, you need to convert the annual risk-free rate into a daily rate.
The annual risk-free rate is 2%, which can be expressed as 0.02. To convert this to a daily rate, you should divide it by the number of trading days in a year, typically 252. Therefore, the daily risk-free rate would be:
Daily risk-free rate
= 0.02/ 252
Hope this helps.
?
