Tag Info

Excess return per unit of deviation in return.

Excess return per unit of deviation in return. Often confused with the simple mean / standard-deviation, a.k.a. signal-to-noise ratio.

A correct Sharpe ratio is defined with respect to a benchmark, against which its excess return can be computed.

In practice Sharpe ratio (SR) is annualized.

A very good reference is The Statistics of Sharpe Ratios, by Andrew W. Lo. It is explained in this paper

• the link with the t-statistic: if a strategy has a Sharpe ratio or $$S$$ that is computed on $$N$$ days, then the t-stat of the strategy is $$S/\sqrt{N}$$
• the correction that must be made if the strategy is not stationary to translate the SR computed on $$N_1$$ days to the one computed on $$N_2$$ days: obviously if the strategy is mean reverting at long time scale, the longer the window of computation, the lower the SR.