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I'm calculating the annualized Sharpe Ratio for a strategy with quarterly trades and would appreciate your input on my approach:

Trades per year: 4 Average return per trade: 1.6% Standard deviation of returns: 2.2% Annualized Sharpe Ratio formula used: ((1.6% - risk-free rate) / 2.2%) * SQRT(4) Resulting in a Sharpe Ratio of 1.44.

Questions:

Is this the correct method to annualize the Sharpe Ratio for quarterly trading?

Thank you for your insights.

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2 Answers 2

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Hi and welcome to the forum.

For performance analytics, the correct way would be to take the whole duration of your portfolio and compute the average daily return and daily volatility (from the log returns). Then you can annualize both metrics with $252$ and $\sqrt{252}$ respectively.

Once done, you can compute the annual Sharpe ratio with your formula (together with the riskless rate).

Another way of saying this is - the computation for the performance analytics should be independent of your rebalancing strategy. Whether you do daily, weekly, fortnightly etc. The performance analytics computation is the same.

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Let's assume you had exactly 1.6% return per trade. Then your annualized return = (1+0.016)^4-1=~6.555%

Your annualized stdev = 0.022*sqrt(4)=0.044

Then your sharp ratio = (0.06555-rf)/0.044

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