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Sharpe ratio
Excess return per unit of volatility — the most quoted and most abused performance metric.
The Sharpe ratio divides a strategy's mean excess return (over the risk-free rate) by the standard deviation of its returns, usually annualised. It answers one question: how much return did each unit of total volatility buy? Introduced by William Sharpe in 1966 as the “reward-to-variability” ratio, it remains the default yardstick for comparing strategies on different scales.
Its abuse comes from what it ignores. The Sharpe ratio assumes volatility is an adequate summary of risk: it says nothing about skew, fat tails or drawdown path, and it is inflated by short samples and by selection among many trials. A 1.5 Sharpe measured on one year of data and picked out of fifty variants is statistical noise until proven otherwise — which is exactly what the probabilistic and deflated versions test.
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