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The ratio of expected return in excess of the risk-free rate divided by return volatility.
The ratio of expected return in excess of the risk-free rate divided by return volatility.
Developed by Nobel laureate William F. Sharpe, the Sharpe Ratio measures the risk-adjusted return of a financial strategy or portfolio. Higher Sharpe ratios indicate superior return per unit of volatility.
Institutional benchmark for comparing systematic strategy risk-adjusted performance.
Daily returns are annualized by multiplying the daily Sharpe ratio by √252.
Can be distorted by asymmetric fat-tailed return distributions.
Portfolio optimization is the construction of an asset allocation that maximises risk-adjusted return subject to investor constraints. The classical framework is mean-variance optimisation (Markowitz, 1952); the modern framework is factor-based, with the portfolio constructed to express a target set of factor exposures and to harvest the corresponding risk premia.
Research methodology is the set of practices that distinguish a rigorous quant research process from a hopeful one. The central topics are backtest audit, multiple testing correction, purged and combinatorial cross-validation, walk-forward optimisation, the triple-barrier labelling method, and the deflated Sharpe ratio. The dominant practitioner reference is López de Prado (2018).