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:

$$\text{Annualized Sharpe Ratio} = \sqrt{N_T} \frac{\bar{R_s} - R_{b}}{\sigma_{R_s}}$$

where $\bar{R_s}$ are strategy returns for a certain period, $R_b$ -- benchmark returns and $N_T$ is number of periods in a year (e.g. 12 if $R_s$ is computed monthly). This seems like a t-statistic?

$$ t_{\bar{x}} = \sqrt{n}\frac{\bar{x} - \mu}{\text{s.e.}({\bar{x}})}$$

So Sharpe ratio can be interpreted as a number of standard deviations from a benchmark returns?

  • 1
    $\begingroup$ @noob2 it divides std in denominator, so you can just move sqrt(n) in front. $\endgroup$ – spacemonkey Sep 21 '20 at 11:28

Yes, Sharpe follows a student's t distribution.



Your Answer

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

Not the answer you're looking for? Browse other questions tagged or ask your own question.