In the calendar anomalies strategy, suggest buying an asset on the day with the highest SR and selling the asset on the day with the lowest SR. Is it possible for somebody to explain in more detail the relation between SR and buying and selling an asset for a better return?
Hi Amir,
The rationale behind this strategy is that the day with the highest Sharpe Ratio is expected to provide a better risk-adjusted return compared to other days. It implies that the asset has historically exhibited relatively higher returns while experiencing lower volatility or risk on that particular day. Thus, buying the asset on this day aims to capture the expected higher returns.
Conversely, the day with the lowest Sharpe Ratio is expected to have a relatively poorer risk-adjusted return. This means that the asset has historically shown lower returns while being associated with higher volatility or risk on that particular day. Selling the asset on this day helps mitigate the potential losses or lower returns that may be expected.
Hope this helps!
Thanks
Rushda