In the book Quantitative trading by Ernest P. Chan, in one of the example we compute the Sharpe ratio of long-short strategy and one step perplexes me:
- In column L, compute the net returns for the hedged strategy as the difference between column H [Long return] and K [Short return] divided by 2. (Divided by 2 because we now have twice the capital.) [Compare to the previous example where we computed the Sharpe ratio of a long only strategy]
I fairly new to the field, but I fail to see the relation between this division by two, since the calculation of the daily return is percentage value:
$$ Daily Return = \frac{adj Close_{t}−adj Close_{t-1}}{adjClose_{t−1}} $$
