# Tag Info

• 6,820

### Should I use an arithmetic or a geometric calculation for the Sharpe Ratio?

The correct answer is "arithmetic mean, because Bill Sharpe says so". He invented the thing, and he's pretty clear on which one he was looking at. If you use the geometric mean, which is lower the ...
• 51

### Sharpe Ratio : why the normalization factor?

If you're annualising your data with T it should always be the same, not changing with the length of your data. To demonstrate, annualising monthly returns, the ...
• 561

### Sharpe ratio with leveraged ETFs

Probably missing something here but if $X$ has $E(X) = \mu$ and $variance(X) = \sigma^2$ then $2X$ has $E(2X) = 2 \mu, variance(2X) = 4\sigma^2$. Thus the sharp ratio defined as $\frac{\mu}{\sigma}$ ...
• 1,411
Accepted

### Is this a poorly written example, or could volatility in fact be negative?

You seem to use the term "volatility" to describe two very different quantities: (1) the diffusion coefficient of your SDE and (2) the standard deviation of the log-returns under your modelling ...
• 14k
Accepted

### Sharpe ratio: discrete or continuous returns?

For client reporting purposes, it is customary to use discrete returns. For backtesting, it pretty much make no difference.
• 10.9k
Accepted

### Sharpe Ratio of ETFs in R

try: library(PerformanceAnalytics) SharpeRatio.annualized(Returns, Rf = 0.05, scale = 252, geometric = TRUE)

### Logic behind sharpe ratio

Another intuitive interpretation of the Sharpe ratio is as a signal-to-noise ratio: $$\frac{\mu}{\sigma}$$ where you compare the strength of the signal (= return) to the level of noise (= risk). The ...
• 27k
Accepted

### What is the industry standard way of calculating and annualizing performance metrics?

To give you an idea of industry standards for funds (although not hedge-fund specific), Morningstar and Trustnet both use monthly returns and annualize their data. See, for an example plucked at ...
• 1,356
Accepted

### Sharpe Ratio and Sortino Question: Standard practice

Theoretically, Sharpe should be the average of (compounded) excess returns divided by the volatility of the same. It was designed to measure the risk-reward preferring the risk asset to riskless. So ...
• 4,936

### What is stopping me from using high leverage on high Sharpe strategies?

Not sure if "3-4 Sharpe" indicates the value of the Sharpe ratio you're earning since such magnitude is meaningless without some benchmark to compare against, due to it being a purely ...
• 2,835
Accepted

### Do passive ETF fund managers care about profolio metric such sharpe ratios and sortino ratio?

Portfolio risk metrics matter a lot for all fund managers. Though certain type fund vehicles can have completely different sets of performance metrics. It's hard to imagine a Venture Fund analyzing ...

### Do passive ETF fund managers care about profolio metric such sharpe ratios and sortino ratio?

The Sharpe ratio and the Sortino ratio are not under the control of the ETF managers, they will be equal (or very close) to the ratios for the Index that the ETF tracks. There is not much room for ...
• 9,617

### How do I calculate Sharpe ratio from P&L?

It is true that intraday/market-making strategies don't have a reasonable "return" metric. For this reason you can't characterize them with the Sharpe Ratio, which depends on a capital basis and how ...
• 233

I'll try to answer according to what I've read (and I hope mostly understood). Let's assume the mean of daily returns is 1%, and the standard deviation of daily returns is 1%. Then: $$Sharpe = \... • 767 4 votes ### Sharpe Ratio : why the normalization factor? The units of returns are 'per time', while the units of variance are also 'per time', thus the units of the Sharpe ratio are 'per square root time'. See section 2.2 of the Short Sharpe Course for a ... 4 votes ### How can risk-neutral pricing find the right price for securities if it doesn't account for risk premia? The price of a derivative does not explicitly depend on the expected return of the underlying, however the price change or return of the derivative depends on the return of the underlying. Hence the ... • 4,237 4 votes Accepted ### Simple Sharpe Ratio Question Related to Trading Strategy First, you do not divide by the variance, but the standard deviation when calculating Sharpe ratios. Secondly, none of them are wrong, but SR_1 is the expected Sharpe ratio of the asset you are ... 4 votes Accepted ### Sharpe Ratio, risk free rate No, this is not the same. For example, consider the scenario$$ \begin{align*} r_A &= 10\% \quad\quad \sigma_A = 10\% \\ r_B &= 1.5\% \quad\quad \sigma_B = 1\% \\ \end{align*}  If $r_f=1\%$, ...
• 741

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