Excess return per unit of deviation in return.

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4
votes
2answers
2k views

Computing the Sharpe Ratio

The building blocks of the Sharpe ratio—expected returns and volatilities—are unknown quantities that must be estimated statistically and are subject to estimation error. The main problem I have is ...
9
votes
2answers
4k views

Kelly criterion and Sharpe ratio

Whats the relationship between the Kelly criterion and the Sharpe ratio? $$ f=\frac{p(b+1)-1}{b} $$ where $f$ is a percentage of how much capital to place on a bet, $p$ is the probability of success,...
1
vote
3answers
292 views

Sharpe ratio in days with no open positions

Should I include or not the days a strategy has no open positions (thus no returns) in the Sharpe ratio calculation?
1
vote
1answer
590 views

Performance Stats of Pairs Trades

This is something I've been thinking about for a while but I can't reach a clear conclusion. When we calculate, for example, the profit factor for a pairs trading strategy, do we treat each pairs ...
4
votes
2answers
3k views

How to define the objective function for a custom optimization problem?

I would like to find the allocations that would minimize some user-defined metric (Sortino, minimum drawdown, etc) for a portfolio of assets. How would one go about formulating the objective ...
9
votes
4answers
937 views

Is this a common variation of sharpe ratio?

As an aside on his answer on another question Freddy said: Sharpe ratio is an often cited metric, though I do not like it too much because you are penalized for out-sized positive returns while ...
15
votes
6answers
17k views

How high of a Sharpe ratio is implausibly high for a low-frequency equity strategy?

I am looking to convince someone that an annualized Sharpe Ratio of 7 is 'extremely high' for a low frequency (daily rebalancing, say) long-short technical strategy on U.S. equities. I was hoping for ...
11
votes
1answer
435 views

How does one measure the effect of latency on potential returns?

I am looking to evaluate the hypothetical advantage one trading system has over another in terms of the possible returns given their latency. Irene Aldridge wrote a piece (How Profitable Are High-...
5
votes
2answers
1k views

How should I compute the Sharpe Ratio for mid-frequency pair trading strategy?

I have a pair trading strategy with positions that last 3-5 days and trades 2-3 times a month. By design, all the trades are profitable until the cointegration is broken. Should I calculate the ...
3
votes
2answers
380 views

How is someone's Sharpe ratio recorded and communicated?

When I read about, say, some hedge fund wanting people with such-and-such Sharpe ratio, how is that ratio recorded and communicated to the interested party? I mean, do people just take it on faith ...
10
votes
0answers
435 views

Can we use White's reality check to compare two Sharpe ratios?

I read a paper from Ledoit and Wolf that proposes a method to compare two Sharpe ratios and a paper from White that proposes a method to compare $n$ trading rules. My question is: Can we use White's ...
26
votes
6answers
32k views

How to annualize Sharpe Ratio?

I have a basic question about annualized Sharpe Ratio Calculation: if I know the daily return of my portfolio, the thing I need to do is multiply the Sharpe Ratio by $\sqrt{252}$ to have it annualized....
8
votes
1answer
1k views

What is the average Sharpe ratio of volatility arbitrage funds?

Where can I get data on performance metrics for volatility arbitrage funds? I am trying to compare the Sharpe ratio of my strategy to those of the major players.
16
votes
5answers
3k views

Should Sharpe ratio be computed using log returns or relative returns?

I am trying to reconcile some research with some published values of 'Sharpe ratio', and would like to know the 'standard' method for computing the same: Based on daily returns? Monthly? Weekly? ...
18
votes
2answers
779 views

How do you correct Max Draw-Down for auto-correlation?

When returns are auto-correlated, calculating a Sharpe ratio := $\frac {mean(x)}{\sqrt{var(x)}}$, (where $x$ are the returns) is complicated, but basically solved (see, e.g. Lo (2005)). Without the ...