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I believe that the Sharpe Ratio in the example
> >http://www.medianline.com/sharperatioexample.xls
which is calculated at 2.49 =F3/F4*SQRT(12) is calculated wrong and should
be 0.21 =F3(F4*SQRT(12)), right ?
0.21 turns it into a "bad" system where the "sharper ratio" of 43.72 would
tell you that it's a "perfect" system !?
Robert
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Robert Linders
Orlando, FL
email: mugsnug@xxxxxxxxx
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----- Original Message -----
From: "Bob Fulks" <bfulks@xxxxxxxxxxxx>
To: "Alex Matulich" <alex@xxxxxxxxxxxxxx>
Cc: <omega-list@xxxxxxxxxx>
Sent: Sunday, January 06, 2002 8:04 PM
Subject: Re: Yes on Sharpe Ratio, BUT is it enough?
> At 11:54 AM -0800 1/6/02, Alex Matulich wrote:
>
> >It seems that the problem you encountered (a high Sharpe ratio for
> >result that have a long flat period) might be fixed by the "Sharper
> >ratio" described in the Excel spreadsheet at
> >http://www.medianline.com/sharperatioexample.xls
> >
> >The difference between the Sharpe ratio and the Sharper ratio is
> >the way they penalize drawdowns versus profits. The Sharpe ratio
> >penalizes upside as well as downside volatility. The Sharper ratio
> >doesn't penalize profitable periods but does penalize drawdowns (and
> >possibly flats; I haven't looked into it).
>
> People have constantly been try to improve on the Sharpe Ratio
> without much success. That is because the Sharpe Ratio is
> fundamental. Study "Modern Portfolio Theory" and you will see why. It
> has a beautiful consistency that is hard to beat. It is an absolute
> measure that works on all investments from buy/hold to the most
> far-out trading systems.
>
> It is easy to show that the investment with the highest Sharpe Ratio
> has the best return-to-risk ratio.
>
> It is also easy to show that the optimum return point for an investor
> (the point that maximizes his "utility function") increases as the
> SQUARE of the Sharpe Ratio.
>
> Many brokerage houses are making piles of money selling short the low
> Sharpe Ratio dumb investments their clients are making and investing
> the money in high Sharpe Ratio investments.
>
> I have found that most of the people who want to modify it do not
> really understand it and don't like the numbers it gives for their
> systems. So they invent something that gives them better looking
> numbers...
>
> There are other important considerations of a trading system such as
> the tradeability, capitalization required, etc., so people should
> quit trying to find the single measure that will tell them if they
> have a good trading system.
>
> I would rather trade a system with high tradability and a moderate
> Sharpe Ratio than one with low tradeablity (for me) and a high Sharpe
> Ratio. But the Sharpe Ratio tells me what I could achieve if I can
> trade it.
>
> Just my perspective, of course...
>
> Bob Fulks
>
>
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