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Sharpe Ratio Applications in Algorithmic Trading
Sharpe ratio applications in algorithmic trading
Sharpe Ratio Overview
The Sharpe ratio is a fundamental risk-adjusted performance measure developed by Nobel laureate William Sharpe. It measures the excess return earned per unit of risk taken, making it essential for comparing investment strategies and portfolios.
In algorithmic trading, the Sharpe ratio serves as a critical metric for strategy evaluation, optimization, and risk management. It helps traders assess whether higher returns are due to smart investment decisions or excessive risk-taking.
The ratio is calculated by dividing excess returns (returns above the risk-free rate) by the standard deviation of returns, providing a standardized measure of risk-adjusted performance that enables comparison across different strategies and time periods.