Questions tagged [sharpe-ratio]

Excess return per unit of deviation in return.

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23 views

Can I use the Sharpe Ratio as an objective function in algorithmic trading?

I’m experimenting with custom loss functions for different trading rules and have come across a few articles citing success in directly using the (negative) Sharpe Ratio as a loss function, ...
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41 views

Industry or academic standard frequency to report the return, standard deviation, and Sharpe ratio?

Everyone (funds, banks, academics, financial information sites etc.) reports the annualized return, standard deviation, and Sharpe ratio. Yet we never get to know what the basis of their computation ...
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138 views

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 ...
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45 views

Sortino ratio lower than sharpe ratio?

Under what circumstances is a sortino ratio lower than a sharpe ratio? What does it mean about the distribution?
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Sharpe from signal to daily return correlation

A few years back in an interview I remember being asked to derive the Sharpe ratio from the correlation between a pre-open daily signal and the open-close returns. I think you had to make some ...
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1answer
51 views

Should the strategy shut down period be considered when calculating Sharpe?

When computing the Sharpe for a strategy, should the shut down period be considered?
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question regarding sharpe ratio calculation

Hi All: I looked in the search icon for questions related to Sharpe Ratio but I couldn't find what I was looking for. My question is about how to calculate it. I will explain the scenario and then ask ...
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36 views

Computing Sharpe ratio correctly when adding more funds

I've a very basic question: Assume, as time $t_0$, I started a algorithmic trading strategy with initial capital $X_0$. My strategy on subsequent $N$ time frames generated returns $r(t_1), r(t_2),..r(...
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165 views

Approximating Sharpe and Sortino ratios from Exponential moving averages

So I've been studying the paper "Learning To Trade via Direct Reinforcement" Moody and Saffell (2001) which describes in detail how to use exponential moving estimates (EMAs) of returns at ...
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1answer
68 views

Portfolio vs individual security Sharpe and Sortino ratios

For an individual security calculating it's Sharpe and Sortino ratios is straightforward. What I'm curious about is the following: Let's say I have a portfolio of several securities, which is a ...
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61 views

Beta Adjusted Return

I'm a bit confused about the definition of the 'Beta Adjusted Return', say I have benchmark whose return is $r$ and a stock whose return is $R$, the beta adjusted return is defined as $$ ...
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Question on the details of certain parameters in Sharpe Ratio [closed]

I'm puzzled about certain parameters in calculating the annualized Sharpe Ratio using monthly return data. Average excess return: Does this mean the arithmetic average of all the monthly excess ...
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2answers
54 views

Portfolio rebalance - How many data back do I need to perform sharpe ratio optimization

if I do a periodical rebalance of my portfolio based on sharpe ratio optimization, how many historical data should I take in account for optimizing with respect to the frequency of rebalancing? For ...
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Is this OK for simplifying Sharpe Ratio?

I've tried using Average(return)/StdDev(return) and it seems to work. I just want to see a measure of equity curve smoothness. Are there any downsides to this?
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60 views

Questions about Sharpe Ratio calculation

Let's say I have daily returns. Don't they depend on the risk per trade I am using? Obviously, if I'm risking 2% of equity per trade returns will be drastically different than when I'm using 10%? So ...
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16 views

annualized sharpe from single day returns with varying cash outlay

Lets say I have a series of daily returns with varying cash outlay. I am trying to take these daily returns to compute the sharpe ratio for the year. my question is about treatment of the weightings. ...
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51 views

how to relate risk aversion and sharpe ratio in optimisation

I am trying to optimise the following: U(w)=w′μ−λ/2w′Σw which is the typical risk aversion problem. I would like to set lambda in order to have the max sharpe but I cannot find in literature what is ...
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69 views

Calculating Sharpe Ratio on a per trade basis?

I have a strategy that I've been playing with and trying to backtest. It's of questionable practicality at the moment, but the idea is to pick one stock from the Dow 30 companies to trade right near ...
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112 views

How to test signifcance of a sharpe ratio

Let say you have measured a Sharpe Ratio of $S^*$. What is the simplest way (ie no fancy distributions) to do a hypothesis that this is different from $0$? So $H_0: \text{ The sharpe ratio is equal ...
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1answer
88 views

Which metric is most predictive: Mean, Sharpe, Calmar, …?

Suppose you have created a new trading algorithm: by varying the params of the algorithm, you get a large number of similar trading strategies (e.g. slightly different trigger thresholds, stop loss ...
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45 views

Annualised Sharpe Ratio of a 24/7 Round-The-Clock High Frequency Trading Strategy

Consider a high frequency trading strategy that trades Bitcoin-USD round the clock 365 days of the year at 5-minute intervals. How would one calculate the annualised Sharpe ratio of such a trading ...
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Maximum Sharpe ratio portfolio - derivation

I want mathematical derivation of how to construct maximum Sharpe ratio portfolio. Any resources with mathematical derivation (if its implemented in Python, that will be great) will be useful
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85 views

portfolio return, sharpe ratio and value at risk

Can you please help me to confirm if my calculations are correct or need improvement, or (too simplistic...) : - portfolio return, - portfolio standard deviation, - portfolio sharpe ratio - ...
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calculating sharpe-ratio and annualized returns

Im trying to get the sharpe ratio to be calculated daily but I can only calculate it annually, this is also happening for my annualized returns, can somebody help me please? ...
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1answer
88 views

Which riskfree rate to use for Maximum Sharpe Ratio Portfolio?

I am conducting out of sample backtests of the MV framework. But how exactly do I derive the Maximum Sharpe Ratio portfolio for this? The standard forumula of the Sharpe Ratio is given by: $$\frac{(...
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Annualizing the Sharpe Ratio

I am doing some calculations and I am working currently with the weekly Sharpe Ratio. Can I annualize the Sharpe ratio by multiplying with the square root of 52? Greetings!
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How to calculate out-of-sample and in-sample Sharpe Ratio?

I am conducting a backtest on different investment strategies and would like to calculate (i) the out-of-sample Sharpe ratio and (ii) the in-sample Sharpe ratio according to "Optimal Versus Naive ...
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93 views

ESG Style Analysis

Hi all and thank you in advance. Do you think that implementing a style analysis on ESG equity portfolios is feasible? When I mean style analysis I refer to the seminal paper of Sharpe (1992) but I ...
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Papers with Sharpe Ratio above 3 [closed]

Could you provide examples of academic papers proposing strategies with Sharpe Ratio above 3? Above 4? Any type of strategy and any mix of asset classes would do. However, a particular interest is ...
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50 views

Sharpe ratio of annualized log returns

I have returns from the last 12 months on a portfolio, and i have risk free rate for the latest year, on daily basis. I have annualized the risk free rate, and i am using log returns for the period. ...
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68 views

Robust Sharpe ratio

The denominator of the Sharpe ratio is sample portfolio volatility, $\sigma_p$, which is the square root of portfolio variance based on the quadratic squared loss, L2. Alternatives for the denominator ...
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376 views

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 ...
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Sharpe ratio of strategy exploiting correlations that vary by time interval

The Epps effect "is the phenomenon that the empirical correlation between the returns of two different stocks decreases with the length of the interval for which the price changes are measured" (...
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213 views

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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181 views

T-bond of what maturity to use as risk-free rate when calculating excess return?

I am comparing different asset classes in order to estimate the expected return and the risk of a portfolio. I have historical data (adjusted close price) for my asset classes for the last 5 years ...
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62 views

step by step calculation of the sharpe ratio

I am trying to calculate the Sharpe ratio. Suppose I have: $$ x_t = \alpha + \beta y_{t} + \epsilon_{t}$$ $$E[x_{t}] = \alpha + \beta E[y_{t}]$$ $$var[x_{t}] = \beta^2var[y_t] + \sigma^2$$ The ...
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1answer
64 views

Is there any way to compare portfolios created using sharpe optimization model?

I created different portfolios using sharpe portfolio optimization model and I want to know is there any way to compare those portfolios before actually investing in them?
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Annualizing Sharpe Ratio using small time frames

I have coded a strategy that works 5m time frame. I know you multiply it by 252 but i am using 5m or sometimes 1h time frame. Which number do i have to chose to multiply? There are 72576 five minutes ...
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1answer
118 views

Sharpe Ratio and Sortino Question: Standard practice

For Sharpe ratio calculation, I have seen several variations for the denominator; either the standard deviation of portfolio returns or standard deviation of excess returns. Is there an accepted ...
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37 views

Relation between Sharpe ratio and amount of capital

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 ...
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455 views

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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117 views

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 ...
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99 views

Risk-free rate in the Sharpe ratio

Let's say I have data stemming from date $t_1$ to date $t_2$, I have the annualized return each day during those two dates. Therefore I know the expected return and the standard deviation of the ...
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60 views

Why not to maximize Sharpe Ratio directly when computing optimal allocation of an order?

I was reading the following paper of Engle about balancing transaction costs performance and risk: https://www.nber.org/papers/w12165.pdf He deals with finding the optimal placement of the child ...
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Given multiple strategies with their ER, volatility, how would I calculate the combined Sharpe?

Without knowing the actual daily returns, I have a table something like this: ...
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66 views

Sharpe Ratio and interest rate

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% ...
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1answer
116 views

Sharpe Ratio - Linear Homogeneous

In the book "Portfolio Construction and Risk Budgeting" of Sherer, there is an excercise with the following prompt: "Use matrix algebra to find the maximum Sharpe ratio portfolio. Show that the ...
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139 views

Geometric Sharpe ratio

I'm computing different metrics for mutual fund performance. I want to use classic Sharpe ratio, but I also got to know there is geometric Sharpe ratio. Unfortunately I didn't find enough info about ...
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147 views

Deriving Single Index Model (Market Model)

$R_{it}=\alpha_i+\beta_i\cdot R_{mkt}+\epsilon_{it}$ $R_{it}$ is the return of the stock of observation $R_{mkt}$ is the return of the reference market $\beta_i$ is the regression coefficient between ...
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Distribution of the Information Ratio // Mean and Variance Product

We are investigating the distribtuion of the information ratio. However, instead of using the original information ratio defined as \begin{equation} IR=\frac{E(r_1)-E(r_2)}{\sqrt{Var(r_1-r_2)}}, \end{...