Hi, I have a question about the annualisation of a sharpe ratio. Why in the formation ML for Trading the formator annualise the sharpe ratio by doing: annual_sharpe_ratio*sqrt(252). Why he doesn't annualise the std and the mean for example? I don't understand this method. Can I have some explanations please?
Hi Lucas,
Annualising the daily mean to annual means multiplying by 252. Annualising the daily volatility, means multiplying by sqrt(252). So the factor for annualised Sharpe ratio it would be 252/sqrt(252) = sqrt(252).
Hope this helps!
I d'ont understand the annnualisation of the volatility. Why you don't do (1+volatility)**255 -1 to have the annual volatilty? why you do annuality*sqrt(255)?
Best regards
The formula you mentioned is not correct. I think it's for calculating annalised compounded returns. You may refer to the correct calculation of annualised volatility here.
Thanks!