Sharpe Ratio Explained: Returns, Risk, and Time Units
Summary
Hollow Point Trading shares a video explaining how to calculate a Sharpe ratio using excess returns and time-matched figures. The example compares a 1% average monthly portfolio return with a 0.2% monthly risk-free rate and 2% standard deviation of monthly excess returns, clarifying that the ratio measures risk-adjusted performance rather than the odds of winning the next trade.
https://youtu.be/5c--PuWCDw0
Sharpe uses excess return and matched time units #SharpeRatio #Risk...
A Sharpe ratio is not your chance of winning the next trade. In a hypothetical monthly sample, assume average portfolio return is one percent per month. A matched monthly risk free return is zero point two percent, and the standard deviation of monthly excess returns is two percent. Subtract the monthly risk free return from the monthly average....
