Hello there:
I have noticed that I have asked some issue concerning a code that I wrote , and at some point , the people who answered me told me to consider the sharpe ratio in order to evaluate my strategy, which involves trading very volatily stocks, now the sharpe ratio involves the calculation of excess return over the volatility, considering the volatility as a measure of risk
But I remember that I have read some time ago, Jean Phillipe Bauchaud says that volatility is NOT A GOOD MEASURE OF RISK , since by definition, risk is the posibility of losing, and if we use the volatility, we assume a simetry between the possibility of losing and the posability of making a profit…
I remember this was in his book: ""Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management""
So, considering this… is the sharpe ratio still to be considered as good measure of the profitability of a given strategy?? if it assumes that the risk is given by the volatility… are there any other ratios to enhance this…??
Hello Ghery,
As you rightly said, the Sharpe ratio is used to estimate the return of a strategy compared to the risk due to volatility. However, just with the Sharpe ratio alone, we can't completely understand the risk of a trading strategy.
In addition to the Sharpe ratio, the maximum drawdown should also be studied for a better understanding of the risk of a strategy.
You can also use ratios such as Sortino ratio and Calmar ratio which are variations of Sharpe ratio and maximum drawdown respectively.
Please check this blog to know more about different performance and risk metrics to understand the performance of a trading strategy.
Hope this helps!