The Sharpe ratio is calculated as the ratio between the return and the volatility.

Now, when I have a trading strategy that requires to be invested sometimes and to be flat other times, I assume 0% during the flat time. This results in 9.5% average annualized return and 9.6% annualized standard deviation. I could compute the Sharpe ratio simply by the ratio of the two. Now I have the option to add a coupon that yields 2% during the flat time. Is it then correct to add the 2% to the return, so the Sharpe ratio grows?

  • 1
    $\begingroup$ The way you compute return should mirror your implementation. If during the "flat" periods, you'll be putting the cash to use and earn that 2%, then yes you should include it in your strategy's total return calculation. $\endgroup$
    – Helin
    Jun 29 '19 at 23:15
  • 1
    $\begingroup$ Correct what Helin says, but you should also compare to the return of a benchmark, otherwise does not show any performance over naive strategies, and that is the real purpose of Sharpe ratio $\endgroup$
    – Vitomir
    Jun 30 '19 at 11:07

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.