Sharpe ratio

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Pals, 

Just a question, im triying yo get some useful info form statistics, and I have 2 questions.

1. Does Sharpe ratio measured in a yearly basis, or daily, weekly?  Its important to know this in order to apply Square root corrections.

2. When calculated, is ti taking into account MAE and MFE for volatility or just closed trades....

Many thanks for your support.

 

I found one article - Mathematics in Trading: How to Estimate Trade Results 

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Sharpe Ratio

Efficiency of investments is often estimated in terms of profits dispersion. One of such indexes is Sharpe Ratio. This index shows how AHPR decreased by the risk-free rate (RFR) relates to standard deviation (SD) of the HPR sequence. The value of RFR is usually taken as equal to interest rate on deposit in the bank or interest rate on treasury obligations. In our example, AHPR=1.0217, SD(HPR)=0.17607, RFR=0.

Sharpe Ratio=(AHPR-(1+RFR))/SD

where:
AHPR - average holding period returns;
RFR - risk-free rate;
SD - standard deviation.

 

Sharpe Ratio=(1.0217-(1+0))/0.17607=0.0217/0.17607=0.1232. For normal distribution, over 99% of random values are within the range of ±3σ (sigma=SD) about the mean value M(X). It follows that the value of Sharpe Ratio exceeding 3 is very good. In Fig. 5 below, we can see that, if the trade results are distributed normally and Sharpe Ratio=3, the probability of losing is below 1% per trade according to 3-sigma rule.

Fig.5. Normal distribution of trade results with the losing probability of less than 1%.

 
And there is one post which I made 10 years ago -

Forum on trading, automated trading systems and testing trading strategies

...

Sergey Golubev, 2009.01.12 07:47

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There are Sharpe Ratio, Modified Sharpe Ratio and Annual Sharpe Ratio. Sharp Ratio is telling us about stability (consistently) of the profit for some signals (lowest value compare with Modified Sharpe Ratio and Annual Sharpe Ratio) - read more here: The Sharpe Ratio 

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Sharpe Ratio is not telling us about how profitable the system/signals. It is telling us about stability of the income.

For example,

  • one signal did 0.1% for the 1st month, 0.1% for the second month and 0.1% for the 3rd month. Sharpe Ratio will be very hight. Because it is stable income every month. Same with banks for example if you will deposit money to them.
  • other signals did 1% return for the 1st month, -2% return for the second month and 5% for the 3rd month. Sharpe Ratio will be low. Because this signal provider is not giving stable consistent profit for every period of time.

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the answer is very clear. Thanks bro. It really helped us to learn.
 

Many thanks, 

I work with Sharp ratios, Sortinos  and Calmar since years. Personally, I don´t like to much this ratio, but is an industry standard

My question is the same.

Regarding signals, 

What Holding period is taken into account when statistics are shown? 

Daily, weekly, monthy or Yearly?

Many thanks for your support.

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