Questions tagged [sharpe-ratio]
Excess return per unit of deviation in return.
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How to annualize Sharpe Ratio?
If I know the daily returns of my portfolio, I need to multiply the Sharpe Ratio by $\sqrt{252}$ to have it annualized.
I don't understand why that is.
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answers
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Should I use an arithmetic or a geometric calculation for the Sharpe Ratio?
What are the advantages/disadvantages of using the arithmetic Sharpe Ratio vs the geometric Sharpe Ratio? Is one more correct? Or is one better in certain circumstances?
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answers
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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?
...
21
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6
answers
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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 ...
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answers
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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,...
20
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2
answers
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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 ...
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answers
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Sharpe ratio and leverage
Does leverage affect the Sharpe ratio? If my Sharpe is 2 at no leverage, does it change, fall by half say, at a different leverage?
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answer
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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-...
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Normality assumption in Sharpe ratio
I have read that the Sharpe ratio imposes a normality assumption, but I fail to see how. Standard deviation is statistic for any type of distribution. Anyone have any ideas?
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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 ...
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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 ...
13
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Intuitive explanation of the Hansen-Jagannathan bound
The Hansen-Jagannathan bound states that the maximum Sharpe ratio of a portfolio can't exceed the ratio of the standard deviation of a stochastic discount factor to its mean. I more or less understand ...
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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 I
...
12
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answers
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How to calculate Sharpe Ratio from $ returns?
I have a pairs strategy that I am trying to calculate the sharpe ratio for. Currently I am using python for my analysis and calculation. I have a dataframe that contains the cumulative returns in $'s ...
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1
answer
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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.
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Forget Kelly, forget fractional sizing. Where is the general theory?
I am struggling to find a general theory of position sizing. Help!
The literature is all about fractional position sizing, but that's just one of the innumerable strategies. What about all the other ...
9
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2
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How do I calculate Sharpe ratio from P&L?
Say I have a market-making strategy that trades intraday. I start with a flat position and finish flat too. I end up with a daily P&L $p_{today}$. Over a year of trading I get $\vec{p} = (p_1,\...
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Maximum Sharpe portfolio (no short selling restrictions)
Suppose we have $n$ assets whose expected return vector is $r$ and is positive, and whose covariance matrix is $\Sigma$. Is there a closed form or quasi closed form (like the eigenvector of a matrix ...
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What is an acceptable Sharpe Ratio for a prop desk?
What should be the value of a Sharpe Ratio for an intraday quantitative strategy to be accepted by a bank or hedge fund's prop desk? Let's assume the returns are daily changes in account equity, close ...
8
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2
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Annualized Sharpe Ratio calculation
I'm trying to replicate the annualized Sharpe ratio of an buy-and-hold strategy for the Dow Jones Industrial Average index for a period consisting of multiple years. I got the daily DJIA (closing) ...
8
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1
answer
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Propagation of Errors of Sharpe Ratio
Looking at Opdyke, J.D., Comparing Sharpe Ratios: So Where are the P-Values?, page 22 (Appendix A) an application is given for the Propagation of Errors formula on a ratio of two random variables:
$$\...
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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 ...
7
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What is the Sharpe ratio of two uncorrelated strategies, each with Sharpe ratio equal 1?
Given two uncorrelated strategies, each with a Sharpe ratio of 1, what is the of Sharpe ratio of the ensemble?
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how to choose top n assets?
I have m assets, and have estimated their future returns and covariance matrix.
I would like to invest in an evenly weighted n product basket from this universe, where 0<n<m.
How do i find the ...
7
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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 ...
7
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1
answer
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Alternative relative performance measure to Sharpe ratio for non-IID return
The Sharpe ratio is often used to compare the relative performance of portfolios despite its IID-assumption for the returns being violated.
I can find ample warnings about the consequences of ...
7
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1
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Significance testing of average returns from Sharpe ratio
I'm aware that one way to do significance testing on a strategy is based on the sampling distribution of its Sharpe (see, e.g., Lo, 2002 and Opdyke, 2008).
However, it appears to me that there's ...
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Sharpe Ratio : why the normalization factor?
I try to understand why a $\sqrt{252}$ normalization factor is useful for Sharpe Ratio:
Let's compute the Sharpe Ratio for this imaginary portfolio, for various sampling periods:
...
6
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1
answer
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why does Cross Validation *not* solve Backtest overfitting?
In this famous paper, Bailey and De Prado discard Cross Validation as tool to check for Backtest overfitting, on the ground that it is just an holdout method:
... If we apply the holdout method ...
6
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Calculate Daily Returns for Sharpe Ratio
For the purposes of Sharpe ratio, I calculate a trading strategy's daily returns using realized P/L only:
$$
\frac{K(t + 1) - K(t)}{K(t)},
$$
where $K(t)$ is the cash balance after market close on day ...
6
votes
1
answer
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What is the relation between Relative Risk Aversion and Market Price of Risk
If we assume that the preferences of investors in a market aggregate to display the following utility function
$$u(W)=\dfrac{1}{1-\gamma}W^{1-\gamma},\quad \gamma>0,\quad \gamma\neq1$$
then from$...
6
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1
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Alpha vs. Sharpe Ratio
What are the main differences between a strategy's Sharpe ratio, and its alpha based on the Fame French factors? Does it make sense to evaluate them both in a thesis?
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Question about adding new investment A to portfolio B
I've found a ton of sources that mention the classic rule of
"If the Sharpe ratio of the new asset is greater than the Sharpe ratio of the existing portfolio times the correlation of the existing ...
5
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1
answer
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How to measure the Sharpe Ratio of a high frequency trading strategy?
The Sharpe Ratio is defined as Sharpe ratio = (Mean portfolio return − Risk-free rate)/Standard deviation of portfolio return.
Unfortunately, this does not make ...
5
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How can I find the portfolio with maximum Sharpe Ratio - Using Lagrange Multipliers
In Markowitz' portfolio theory we can construct portfolios with the minimum variance for a given expected return (or vice versa). Across expected risks, this traces out the well-known efficient ...
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Bootstrapping Sharpe Ratios
A similar question to this was asked here:
How do i test the significance of Sharpe ratio of a strategy using bootstrap
I have bootstrapped the original time series (using block bootstrapping) and ...
5
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2
answers
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mean variance optimization vs max sharpe ratio
I keep reading/hearing that the results from mean-var optimization is max Sharpe ratio. It seems making sense if you fix either target return or target risk, but in general, it doesn't seems right, ...
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Bayesian strategy selection
I have N strategies/signals that I would like to allocate to. I want to estimate an estimate of future performance based off of recent realized performance (momentum of strategies per se - e.g. ...
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Logic behind sharpe ratio
I have a confusion regarding how the sharpe ratio is derived. My question is why the denominator contains the standard deviation of returns of portfolio? I mean why did someone came to this conclusion ...
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Sharpe Ratio, annualized monthly returns vs annual returns vs annual rolling returns?
I would like to calculate the Yearly Sharpe Ratio on MSCI World index
I have monthly values of the index that falls back up to Jan/1970, hence about: 44 years, 528 months
In order to calculate ...
4
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4
answers
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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?
4
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2
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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 ...
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Difference between Sharpe Ratio and Information Ratio
I am finding it difficult to understand the difference between the sharpe ratio and the information ratio and the relationship between the two, and cannot find a decent reference that breaks it down ...
4
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Sharpe Ratio Formula
In calculating Sharpe Ratio, I have come across a variety of equations that are similar but differ in wordings. I am curious to know which one is used within best practice. Here are all the different ...
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1
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What is the industry standard way of calculating and annualizing performance metrics?
Say I am looking at a performance report for a hedge fund manager who trades mostly equities, and they provide me a list of monthly returns for the past 5 years. What is the industry standard way to ...
4
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1
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Sharpe ratio with leveraged ETFs
There has been a discussion about how leverage affects Sharpe Ratios, but not in the context of leveraged ETFs (such as 2x or 3x).
I'm just wondering how leveraged ETFs, if at all, change the ...
4
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1
answer
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If returns are correlated, are Sharpe ratios correlated?
Suppose we have two correlated return series:
$$a \sim N(\mu_a,\sigma_a^2)$$
$$b \sim N(\mu_b,\sigma_b^2)$$
$$correl(a,b)=\rho$$
The sample Sharpe ratios of the two series, after $t$ samples for $t \...
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1
answer
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Is scaled Sharpe ratio a t-statistic?
I was just reading Quantitative Trading: How to Build Your Own Algorithmic Trading Business and it suggests annualizing Sharpe ratio in order to compare performance of strategies:
$$\text{Annualized ...
4
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What value should the risk free monthly return rate be (Sharpe ratio calculation)?
In calculating an annualized Sharpe ratio using monthly returns, what is commonly used as the value for the risk free rate? I am using this formula:
...
4
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1
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How is the Sharpe Ratio presented in fund profiles usually calculated?
To compare my stock portfolio generator with managed funds performance, I want to calculate the Sharpe Ratio of my historic portfolios with the numbers found on the fund company web sites or in ...