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> In the extreme case of a system that has no losses whatsoever, you'd
> get a lower sharpe ratio on a system that consistently has variable
> returns higher than the risk free rate, compared to a system that
> has low non-varying returns.
I'm not sure I buy that hypothesis or the whole notion that Sharpe
"punishes" upward volatility. There are two terms in the Sharpe formula:
profit and stddev of profit. Downward volatility decreases profit;
upward volatility increases profit. Upward volatility gives a higher
Sharpe ratio every time. As to your example above, I'd have to see some
numbers. My practical experience is systems with low returns give a low
Sharpe ratio, just as they should.
--
Dennis
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