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As Bob F. and others have pointed out, the SR is dependant upon profit
distributions being gaussian. After reading "The Black Swan" by Taleb, I
have my doubts.
Regards, Jack.
----- Original Message -----
From: "Trey Johnson" <trey.johnson@xxxxxxxxx>
To: "Omega List" <omega-list@xxxxxxxxxx>
Sent: Tuesday, January 01, 2008 10:17 AM
Subject: Re: "The Sharpe Engine" My 2008 project
It seems that real problem involves the higher moments
of the distribution, right? In comparing a sample of
equity curves, if they are all normally distributed
then there's not much of a problem with the sharpe
ratio. However, if the curves happen to exhibit
varying degrees of skew and kurtosis then there is a
problem in that you aren't comparing apples to apples,
so to speak. An equity curve with a high SR and
negative skew might not be preferable to an equity
curve with a lower SR and positive skew.
Trey
--- DH <catapult@xxxxxxxxxxxxxxxxxx> wrote:
> Another example: System A returns 0.001% greater
than the risk-free
> interest rate with zero-to-few drawdowns, and
almost-perfect
> consistency. System B returns 60% per year on your
account with
> modest 10% drawdowns. System A will have the
higher SR due to
> near-zero standard deviation, but I'd still prefer
system B.
All these hypothetical system with near-zero SD,
making the divisor
approach zero, are fun mental exercises showing how
Sharpe sucks in
theory but, in the real world of real systems, it's
pretty rare to see a
system with a Sharpe > 1. If you see one with Sharpe
> 3, it's one you'd
better pay attention to. ;-)
--
Dennis
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