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Bob,
Thanks for the informative reply. It's amazing how a seemingly simple
calculation can become complex when it's examined closely.
Last night after posting my original questions, I continued reading the
following paper... http://www.stanford.edu/~wfsharpe/art/sr/sr.htm
I'm sure you're familiar with this, but there are issues that further
complicate things, such as time dependence. This basically states that
an annual SR will differ from, say, a six month SR.
Sharpe also wrote about two versions of the SR, ex-ante & ex-post, the
difference in which I don't fully understand at this point. Though it
appears that the ex-ante version is the SR as you've described it in
previous posts - Sharpe = (Total %Return - %Risk free return) / StdDev%.
Whereas the ex-post appears to be - Sharpe = (AVERAGE of differential
returns) / StdDev of differential returns.
So, to recap based on what has been discussed so far, I think I can
assume the following things concerning the Sharpe Ratio.
1) For the purposes of testing and comparing my own systems, it is safe
to exclude the risk free rate of return from the SR calculation. This
must be done with the realization that this will create a small error in
the final result, and the size of this error will be inversely
proportionate to the %Return in the equation.
2) When a particular Sharpe Ratio is claimed for a given system, it is a
virtually meaningless number if it is not accompanied by some additional
information, such as - Assumed Risk Free Rate, Time Period over which it
was calculated, & even Method of Calculation.
3) The method for calculating SR for a trading system is, Sharpe =
(Total %Return(over x time) - %Risk free return(over x time)) / StdDev%
of Individual Trade Returns (over x time).
Thanks again,
Lance Fisher
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