When calculating the Sharpe Ratio, say, for ten years of data, what is generally accepted as the risk-free rate? 90-day T-Bills? 1, 2 year Notes? The T-Bond yield for the comparable term at inception?
I agree with Peter Irojah. Some people think or used to think that Risk Free Rate was related to Government issuances but those rates can be distorded ; I rather prefer taking into account Libor Rates or Forward rates and in anycase adjust to maturities (1 month, 1 year, 5 years …) and look for inflation.
Besides when using the US’Bonds YTM to estimate emerging markets, investors should think about the added volatility of the Exchange Rate.
Anyway, risks are present before investing so the better risk management is, on my view, to compute the amount of risk one’s willing to take ex-ante.