What is Sharpe Ratio?
The Sharpe ratio is a strategy's average return above the risk-free rate divided by the standard deviation of its returns, so it measures return per unit of volatility.
How it works
William Sharpe introduced it. The figure is usually annualised, and a higher number means more return for the same ups and downs. It lets two strategies with different volatility be compared on one scale, for example a smooth strategy against a wild one.
What it can't tell you
It treats upside and downside swings as equally bad, and a single ratio hides skew, fat tails and serial dependence in returns, which also weaken any significance test built on it. A short or lucky backtest can show a high Sharpe ratio that disappears on new data.
How Tickfloor uses it
Tickfloor's holdout results compare each rule's Sharpe ratio with its benchmark's.
Does it work as a strategy?
This is a concept more than a trading rule, so there is no single strategy to score. It matters for reading the results below.
Tickfloor's research desk has backtested 517 strategies, most against an equal-weight benchmark of the same assets rebalanced daily that pays no costs (the strategies pay theirs). After correcting for the 598 tests run (Benjamini-Hochberg), 0 passed. That does not prove no strategy works. These are historical diagnostics, not validation under Testing Standard v2: the backtest harness predates that standard and has not been re-run to meet it.
General information only. It doesn't consider your objectives, finances or needs. Tickfloor holds no financial services licence and never places trades.
Common questions
What is Sharpe Ratio?
The Sharpe ratio is a strategy's average return above the risk-free rate divided by the standard deviation of its returns, so it measures return per unit of volatility.
How does Sharpe Ratio work?
William Sharpe introduced it. The figure is usually annualised, and a higher number means more return for the same ups and downs. It lets two strategies with different volatility be compared on one scale, for example a smooth strategy against a wild one.
What are the limits of Sharpe Ratio?
It treats upside and downside swings as equally bad, and a single ratio hides skew, fat tails and serial dependence in returns, which also weaken any significance test built on it. A short or lucky backtest can show a high Sharpe ratio that disappears on new data.
How does Tickfloor use Sharpe Ratio?
Tickfloor's holdout results compare each rule's Sharpe ratio with its benchmark's.