Questions tagged [sharpe-ratio]
Excess return per unit of deviation in return.
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"Find the current market price of your market portfolio according to No Arbitrage condition"
In Excel, I have the monthly stock price data for the past five years for Asset A and Asset B. I have calculated the monthly returns, mean returns, variances, and standard deviations for both stocks ...
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Test significance of Sharpe ratio using machine learning
I am trying to create forecasts for ETF returns using machine learning tools and I am creating mean-variance portfolios based on these forecasts. I want to compare the Sharpe ratios of these different ...
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If returns are correlated, are Sharpe ratios correlated?
Suppose we have two correlated return series:
$$a \sim N(\mu_a,\sigma_a^2)$$
$$b \sim N(\mu_b,\sigma_b^2)$$
$$correl(a,b)=\rho$$
The sample Sharpe ratios of the two series, after $t$ samples for $t \...
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Propagation of Errors of Sharpe Ratio
Looking at Opdyke, J.D., Comparing Sharpe Ratios: So Where are the P-Values?, page 22 (Appendix A) an application is given for the Propagation of Errors formula on a ratio of two random variables:
$$\...
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Quick simple way to aggregate sharpe ratio for a portfolio with derivatives
Suppose I have a portfolio with a mix of long short equity, some bonds, as well as derivatives such as options. Is there a quick way to aggregate sharpe ratio on a portfolio level? I would imagine ...
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Taking into account of transaction cost and initial margin into calculation of Returns and Sharpe Ratio
As a follow up question to this question
How to take into account of transaction cost in return and Sharpe Ratio?
I am thinking that if I need to take into account of transaction cost, and suppose I ...
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How to derive the sharpe ratio for an intraday strategy
I have an intraday strategy, which will place 0-5 trades for each intraday trading session. (Note that some days it will not place any trades out). The average duration of a trade is around 33 minutes....
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What can we say about the probability a strategy losing money in a year if it has an annualized Sharpe of say 2?
If we imposed the restriction that the strategy is not skewed, then using Chebyshev's Inequality I can show that the probability of it losing money in a year is less than 12.5%.
Let $X$ be the yearly ...
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How to annualize sharpe ratio using quarterly data?
Say I have quarterly returns data for a stock. I am currently calculating rolling Sharpe ratios using an eight-quarter forward window. So for example, say I have quarterly returns data starting in ...
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Relationship between Sharpe Ratio and Investment Horizon in a theoretical IID return world
In his paper, "The Statistics of Sharpe Ratio", Andrew Lo writes
"hence, the ratio will increase as the square root of q, making a
longer horizon investment seem more attractive. This ...
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When calculating Geo Sharpe for the numerator do you take Geo Mean of Arithmetic Excess Return or Geo Mean of Geometric Excess Return?
Geometric Excess Return is ((1+Portfolio Return)/(1-Risk Free Rate))-1 whereas Arithmetic Excess Return is simple (Portfolio Return-Risk Free Rate). My question is do you take Geo Mean of the former ...
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Subtracting RF Annually from Portfolio Return vs Subtracting RF from 20 Year Portfolio Return
Subtracting RF Annually (In my case RF does not stay constant throughout the year so I take the 1 Year Geo Mean of the RF and subtract that (by doing simple subtraction not ((1+Annual Portflio Return/...
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Difference between Treynor ratio and market premium
The definition of Treynor ratio is given by
$$
T = \frac{r_i-r_f}{\beta_i},
$$
where $r_i$ is the portfolio $i$'s return, $r_f$ is the risk-free rate and $\beta_i$ is the portfolio $i$'s beta. I am ...
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Skewness consideration for Sharpe Ratio
I have calculated Skewness of the full time period monthly returns for all the portfolios 50-50 Gold Sensex, 50-50 USA Sensex and Sensex and they at worst indicate moderate skew so this suggests ...
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I am comparing two assets Rolling 10 Year Sharpe Ratios. I want to know what percentage increase in Sharpe Ratio is meaningful?
If Asset A is having 35% higher Sharpe Ratio than Asset B is that significant? Or should I consider that only if Asset A is having 50% higher Sharpe Ratio than Asset B.
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how to calculate the Sharpe ratio based on a list of trades, with space between them?
First, there are a few things I'm not clear about, like what the 'risk free' return is.. is there even such a thing in trading? or how to handle inactive days, etc.
Let's assume I have a period of 30 ...
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long short portfolio sharpe ratio
What is the proper way to caluclate sharpe ratio for the long short portfolio? When I calculate daily return with no cost, I use this formula: (return for long k.mean()+ (-1)*(return for short k.mean()...
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Why does the mean term have a higher effect than the covariance term in MV optimization? [closed]
I am trying to use the mean-variance (MV) optimization framework. When I change the mean term using future-ground-truth return (I am not supposed to do so), it has a higher effect on the MV ...
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Tangency portfolio negative maximum Sharpe ratio
Suppose I have three assets: the market, factor A and factor B. The market is in excess returns of the risk free rate. The other two factors are long-short portfolios. I have net returns for these ...
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statistically compare 2 sharpe ratios
I have a problem regarding comparing sharpe ratios of portfolios. As an example: I have constructed a portfolio from monthly data over 5 years, giving me a sharpe ratio of 0.85. I have a portfolio ...
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Calculating Sharpe Ratio with semi-standard deviation
Would it make sense to calculate the Sharpe Ratio with the semi-standard dev. So as to standardize/compare asset returns to their downside risk?
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How to annualize Sharpe Ratio if monthly returns are serially correlated? Calculation of autocorrelations
I am looking at a data set of 60 monthly returns (last 5 years) and want to calculate an annualized Sharpe Ratio.
The usual way of doing this is to calculate the monthly Sharpe Ratio first, and then ...
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efficient frontiers are equal
I created 3 different efficient frontiers with 3 different risk factors(sharpe ratio, ulcer performance index and serenity ratio) and I wanted to find both MSR and GMV(and their equivalent for the ...
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Is this quadratic form the Sharpe ratio?
I'm reading Merton's An Analytic Derivation of the Efficient Portfolio Frontier. In section IV, he derives the efficient frontier with a riskless asset. Let $\mathbf{w}$ be a vector of portfolio ...
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mean-variance optimization === max sharpe ratio portfolio?
Noobie here. I just wanna ask a simple question:
in the context of portfolio optimization, is Mean-Variance optimization the same as the max sharpe ratio portfolio?
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Compute Sharpe ratio and annualized Sharpe on captured bar returns or trade returns?
I am currently using a vectorized backtester where I have a strategy_returns series which is just a version of the bar-to-bar ...
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Confidence in Sharpe ratio given performance
Suppose I have a strategy that I believe has a Sharpe ratio of X - not the Sharpe ratio of the backtest (this can be absolutely determined), but the ratio I expect it will actually take on over the ...
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Sharpe ratio and uniformly distributed random portfolio
I am currently working on this paper which derives the Sharpe ratio distribution of uniformly random porfolios:
https://www.researchgate.net/publication/...
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Does the interval of a portfolio's returns affect Sharpe and Sortino? If so, what's the gold-standard interval?
I'm currently creating a backtesting script and I've got to the point of calculating risk metrics.
It seems like the interval (daily, weekly, or monthly) I use for returns heavily changes the ...
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Practical implications of Andy Lo paper on Sharpe ratio using quarterly returns?
I am hoping to determine the practical implications of the Andy Lo paper criticizing the use of a scaling factor in converting periodic Sharpe ratio to annualized Sharpe ratio. I am particularly ...
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How do I calculate the sharpe ratio of a portfolio of stocks?
If I have daily prices for $N$ stocks, how do I calculate the Sharpe ratio for an equal volatility weight portfolio?
On each day, I have calculated log returns as:
$$
r_{t}^{s} = \ln{price_{t}\over{...
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Optimal active risk
Can someone help me prove the statement or share a link of the proof -
"The optimal amount of active risk is the level of active risk that maximizes the portfolio’s Sharpe ratio. This optimal ...
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Maximum Sharpe ratio and mean-variance optimization
I want to understand why this holds:
$argmax_w ( \frac{\mu^T w}{\sqrt{w^T\Sigma w}})=\Sigma^{-1}\mu $
I just found this post:
Derivation of the tangency (maximum Sharpe Ratio) portfolio in Markowitz ...
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Sharpe Ratio - Daily vs Annual
How do I go from daily to annual sharpe?
Say I have an asset with average daily return of 0.1% and a daily return standard deviation of ...
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Comparing Negative Sharpe Ratio
It is widely accepted that the higher the Sharpe Ratio, the better. But, how do we compare two strategy with negative Sharpe Ratio?
Suppose we have two trading strategy $A$ and $B$. Consider the ...
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relation between risk averson coefficient and maximum Sharp ratio in Black-Litterman context
BL model compute the implied returns based on the reverse optimization where the objective is:
$${\underbrace U_{{\rm{investor's \ risk \ utility}}} \buildrel \Delta \over = {\bf{w}}_M^T{\bf{\Pi }} - \...
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Sharpe Ratio of a Long-Short Portfolio
I have a portfolio High and Low (according to the highest profit). From this I have formed my long short portfolio and calculated my Sharpe Ratio. How to interpret this correctly? Does a positive ...
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Standardizing Sharpe Ratio or not when standardizing Features
I am currently trying to check the Feature Autocorrelation for a Trend Strategy. I am using XGBoost for that purpose. In addition I work with SHAP.
In the first run I realized that without ...
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why does Cross Validation *not* solve Backtest overfitting?
In this famous paper, Bailey and De Prado discard Cross Validation as tool to check for Backtest overfitting, on the ground that it is just an holdout method:
... If we apply the holdout method ...
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Correct way of making sharpe optimized portfolio?
I have monthly returns of about 977 securities of past 10 years.
If I keep the returns as it is i.e. I do not multiply by 100 and keep the returns as 0.1, 0.2 , -0.3, 1.2
then I get different results ...
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What does negative proportion mean in sharpe optimization model?
Using the last 20 days of market return and some stocks return I made sharpe optimial portfolio and following were the stock names and investment proportion to be made.
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Can I use Sharpe optimization model for short term portfolios?
I wanted to know if there are any mention of what is optimal lookback period i.e. how many days, weeks, months or years of return data I should consider for constructing sharpe optimal portfolio and ...
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How to test the difference between samples of sharpe ratios
I am testing the performance difference between 2 portfolio strategies. I use Monte Carlo simulation in R to generate $N$ simulations of portfolio returns for each strategy. I then compute the Sharpe ...
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Why not calculate Kelly using semivariance? As w Sortino
Kelly is calculated as mu / sigma^2. If we remove our highest performing returns from our calculations this actually increases our Kelly leverage, which does not make sense to me. A less profitable ...
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Optimise the Sharpe ratio of a portfolio of uncorrelated assets
Given a portfolio of $n$ assets, mean returns vector $\mu$, covariance matrix $K$, one can calculate the portfolio weights $w^*$ that maximise the portfolio Sharpe ratio, by solving:
$$w^*=\text{...
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Do options have diversification benefit?
Imagine the universe where we have one investable volatile asset but with an available liquid options chain for it.
The question: can a portfolio consisted of this asset, and some options have any ...
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How to compute a portfolio PnL and Sharpe?
I understand this is quite the common question but I haven't been able to understand this concept through the previous posts.
My situation is that each day, I'm interested in buying/selling one ...
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Sharpe ratio from second returns? HFT
I have an intraday trading strategy so I take several positions each day. I have prices for each stock, with a 10 second resolution. So the data looks like this:
...
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Optimal Portfolio Formulation
I'm currently studying Luenberg's Article "Projection Pricing" (Jrl of Optimization Theory and Applications, Vol. 109, No. 1, pp. 1–25, April 2001) and there is a claim that I can't prove.
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From annualized Sharpe Ratio to number of daily losses
I have seen a few statements that link a particular annualised Sharpe Ratio to the likely frequency of 'loss day' across a given period:
e.g. "A annualised Sharpe Ratio of X, implies the ...
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