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>From this list I have learned to trust the Sharpe-value. The calculation
behind it seems fair, but yet, when looking at the results I get usig it
compared to Kelly value and other figures, I realise I have to change the
portfolio calculation.
The problem seems to lie in the assumptions behind my own portfolio
calculations, and thus I need advise on how to adjust the calculations. If i
do the calculations on only one stock everything is fine. What is happening
is that on some shorter days there are a lot less trade than on longer days,
and on some days by pure chance some less traded stocks are not traded at
all. The portfolio calculation translates this to a risk using the Sharpe
value, which is fair, but looking at it I see that the risk is overestimated
in strategies using fewer buys than strategies using many buys.
My guess is that this can be remedied by using equity per stock for each day
in the calculation instead of just equity as is done now. My question is if
I am right, and if not what else to do.
Below is an explanation of the calculation at what I consider as the wring
assumption.
Date Equity Number of stocks Equity per stock
990119 280000 303 924
990121 260000 281 925
990122 283000 305 928
990123 261000 281 929
As can se above, when calculating Sharpe ration based on equity change from
day to day, the value will go up and down (-20000 first day, +23000 next
day, minus 21000 thirs day, ...). This is how the calculation is done today,
giving a low sharpe ratio in the end. If I instead would calculate the risk
based on changes in equity per stock included in the measure, I would get a
much smoother curve.
It can be argued that the risk is higher since the trades include stocks
that by some reason do not trade each and every day, thus the Sharpe ratio
shall swing more. I can accept that as the truth, but I prefer to view that
as a micro-level calculation which is to be considered and remedied when
creating the trading systems and trading them, not a macro level assumption
that shall result in such swings in the portfolio Sharpe calculation as it
does. Instinctively I feel that using the equity per stock should be a much
fairer result than equity that is travelling up and down just because some
stocks do not trade same days as others (this will always be the case when
trading international markets, some markets will have holidays when others
do not).
I would very much appreciate any help and input on this subjet. It is from
this list I have learned to trust the Sharpe ratio, now I would like to have
a little help in applying it better to Portfolio level calculations than I
do today.
--- Mats ---
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