My favorite
subject/issue--performance measurement. The most preferred benchmark by
which investment and/or trading results are measured is the Sharpe
ratio. However, imo there's a valid modification one should make to
this measure. The Sharpe ratio assumes the risk-free rate is the
interest rate of 90 day Government paper. That's unreasonable as there
are plenty of alternatives that aren't classified as junk paper--270
day BBB+ Corporate notes, for example. Even GM short-term paper is
still pretty much risk-free!
Therefore, a
modified Sharpe ratio (MSR) would be: annualized daily average return
less the Corporate short-term interest rate, divided by the standard
deviation of the annualized daily average return, is 'my' benchmark for
investment and/or trading. When calculations are annualized short-term
or long-term isn't too relevant.
If your
trading systems can't exceed 1.5 MSR--the higher the number the better
the performance--it's back to the drawing board. fwiw, very few mutual
funds exceed 1.0 MSR :). Very good hedge managers obtain 2.0+ MSR.
Colin West