Standard deviation in sharpe ratio calculation

Algo Trading Business
1

Course Name: Volatility Trading Strategies for Beginners, Section No: 5, Unit No: 12, Unit type: Notebook

Hello, in this notebook the formula used for getting the sharpe ratio of both strategies is:

sharpe_ratio = round(returns_series.mean() / returns_series.std() * np.sqrt(252), 2)

Why the standard deviation is calculated as the square root of 252 (1 year)?

2

Hi Daniel,



The Sharpe ratio is usually presented annualised. Consequently, since we have daily data, the Sharpe ratio must be converted to annualised values. Since we are working with daily data, there are 252 trading days in a year to be assumed. Therefore:





Annualised Sharpe ratio = Sharpe Ratio ∗ √252



To get a more clear understanding of Sharpe Ratio you can also go through the Sharpe Ratio practice module on Quantra.



Hope this helps!



Thanks

Rushda

3

I didn't know about how to annualize the sharpe ratio.



Thanks.

4

Glad to know I could help!



Hope your query has been resolved :slight_smile:



Thanks

Rushda