Risk free rate on sharpe ratio calculation and optimisation tool
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FdeZarJanuary 08, 26 | Posted in General
Hi, in relation to the Risk Free rate field on the Portfolio Optimisation tool , can you clarify whether you use the prevailing level in case the field is left blank or does it immediately assume risk free is zero?
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FdeZarJanuary 13, 26
in relation to my previous question, there is a field for target return. Can you clarify whether this is field is requirement? how should we define the optimisation for both fields Target Return and Risk Free Rate if one is looking to achieve the tangency portfolio?
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Dmitry Shevchenko
2mo ago
The target return field is not required and actually should not be used if you want to find the tangency portfolio. For tangency portfolios you typically use Sharpe maximization (or similar risk-adjusted metrics like Omega or Sortino). Target return is only useful when you want to find an allocation with minimal risk for a given return level.
The risk-free rate field is used for calculating risk-adjusted return metrics (Sharpe, Sortino, etc.). If you are optimizing for a tangency portfolio, you can use this field for precise risk-return measure calculation.
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