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Hello Gabriel,
Thursday, January 22, 2004, 3:05:47 PM, you wrote:
GG> deviation is just .0104 for a Sharpe of 4.7. Take another distribution
GG> of returns of 1% a month for 9 months, 20% the next, 50% the next, and
GG> 70% the last. Your average return is 12.4%, your standard deviation is
GG> .23, but your Sharpe is just .53. The first distribution returns 79%,
GG> but the second 234% with no drawdowns!
Yes, but would you bet your money on it? Take the opposite extreme:
making about 12.4% EACH month throughout the 12 month period. Which
example is better at telling you when the future is no longer singing
the same song?
If I traded the Sharpe = .53 example, I wouldn't even know what the
song is, let alone know when to quit before I lost a fortune. This is
what the Sharpe is trying to tell you.
You can't treat this like throwing a bunch of marbles in the air
several times, creating a histogram describing where
they land, and ignoring the data outside one standard deviation. When
you look at a sequential set of data, you must consider all of the
outliers and how they are arranged in the sequence, in order to
understand the historical phenomena and establish a level of
confidence about the future.
-F
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