Why (252)**(1/2)?

Installations & Python Packages
1

Course Name: Getting Started with Algorithmic Trading!, Section No: 9, Unit No: 6, Unit type: Notebook

can you provide an explanation why: This is because we want to annualise the sharpe ratio. Annualisation is standardising a value to one year time. 

(returns.mean()/returns.std())*(252)**(1/2)

I do not understand why are we multiplying by 252 square root

thanks

2

Hey Sebastian,



We assume 252 trading days in one year hence we multiply it by the square root of 252 to get the annualised volatility. You can refer to Quantra's glossary for further clarity.



Thanks,

Rushda Ansari