# How does Sharpe Ratio work and what are the disadvantages of using it?

I am trying to understand Sharpe Ratio and I have tried to calculate it and compare it with Sharpe Ratio value from Yahoo Finance.

I took daily closing prices for SPY from February 1st, 2018 till January 29, 2021 (inclusive).

``````Date
2018-02-01    281.579987
2018-02-02    275.450012
2018-02-05    263.929993
2018-02-06    269.130005
2018-02-07    267.670013
...
2021-01-25    384.390015
2021-01-26    383.790009
2021-01-27    374.410004
2021-01-28    377.630005
2021-01-29    370.070007
``````

Calculated daily change:

``````Date
2018-02-02   -0.021770
2018-02-05   -0.041823
2018-02-06    0.019702
2018-02-07   -0.005425
2018-02-08   -0.037509
...
2021-01-25    0.003944
2021-01-26   -0.001561
2021-01-27   -0.024440
2021-01-28    0.008600
2021-01-29   -0.020020
``````

Mean value of daily change values:

``````0.0004691536096486628
``````

The standard deviation of daily change values:

``````0.014525375524599708
``````

Calculated Sharpe Ratio according to the formula: 'square root of 252' x 'Mean value of daily change values' / 'standard deviation of daily change values':

``````0.512729096352712
``````

According to Yahoo Finance, the 3-year Sharpe ratio for SPY is 0.72, not 0.51.

Question 1. Why I am getting a different value other than Yahoo Finance?

Question 2. As I understood the higher Sharpe Ratio, the better. Why do not investors just calculate Sharpe Ratio for all stocks and invest in stocks with the highest Sharpe Ratio?

• I don't know the answer but Yahoo is notorious for providing bad data. See if you can find another source for comparison and perhaps it will align with your calculations. If it aligns with Yahoo's data then maybe your analysis is off. – Bob Baerker Feb 1 at 16:44