Sharpe Ratio??

Discussion in 'Trading' started by retire45, Mar 20, 2008.

  1. I am a member at and attached is their Sharpe Ratio sorted rank list. I am 3rd there and have no clue why. And Mr. Timothy Sykes is at the top Sharpe but carries higher risk. Can anyone in plain english explain what factors affect Sharpe ratio and whether it matters to investors..

  2. Sharpe Ratio is a measure of risk adjusted return. It's based on annualized numbers, so if you are working with a daily returns, you need to annualize them,

    Average Annual Return = Average Daily Return * 252 Days.
    Average Annual Standard Deviation = Standard Deviation of Daily Returns * sqrt(252)

    Sharpe Ratio = (Average Annual Return - Annualized Risk Free Rate) / Average Annual Standard Deviation.

    Investors do look at Sharpe Ratio, because it's a way to normalize returns for easy comparison. One of the drawbacks of Sharpe ratio is that it penalizes you for large gains, since they will also show up in the denominator. A similar measure is the Sortino Ratio, which only looks at the negative deviations.

    You can increase the Sharpe ratio by increasing the average return, or by decreasing the annualized standard deviation. Timothy Sykes has 2.08 times the risk as you, but more than 3.3 times the return, so he has a higher Sharpe ratio. Awesome Sharpe ratio by the way. Congrats! I hope you have size too...
  3. Thanks.. I will study that.. Should've Googled it first.. Question is how they measure risk without knowing my risk control methods.
  4. Thanks Ferguson.. So it rewards "grinding" type trading.. Thanks for the compliment but it's interesting because some would consider my money/trade management too risky as even when fully invested on maximum leverage I am never in more that 6 markets though I cut trades off (frequently to my agony later) that show the slightest red VERY quickly..
  5. Depending on the company you keep, a Sharpe ratio of > 2.0 is generally considered good. Many HF Stat Arb shops would consider a Sharpe ratio > 5.0 to be excellent. It becomes more meaningful the longer the period, and the more assets under management.
  6. Anyone with those #s on anything other than one-off jackpots (err... Neilson hedge fund example?) is simply brilliant.

    Try to have a sharpe ratio above just 1 (that is scalable) over the long term in an automated trading system with no overnight risk requires nothing short of brilliance.
  7. Ok.. Reasonably good measure of performance then.. Now about the size part..:D
  8. none of those sharpe ratios mean jack. they're all based on a few months of trading.

    mine is 4.9 since 2000. that means a lot more than these gamblers. give them another year or two and they'll all be under 0.3.
    #10     Mar 20, 2008