The above definitions for Sharpe ratio are not quite correct. The Sharpe ratio is a measure of excess return over the risk free rate (which is usually taken as LIBOR) normalized by the volatility of the trading algorithm. Furthermore, the numbers used in the numerator and denominator are not absolute values, but percentages. The sharpe ratio adjusts for cost because the return is expressed as a percentage and not as an absolute number.
Sharpe Ratio = (return - risk free rate)/volatility return = your return as a percentage risk free rate = London Interbank Offering Rate (LIBOR) - the interest rate banks charge each other for lending volatility = standard deviation of returns, as a percentage So for instance, if your strategy returns 23% over 1 year with a volatility of 10%, and taking LIBOR to be 3% then your sharpe ratio is SR = (23 - 3)/10 = 2 Note that when comparing sharpe ratios between strategies that the time periods for the calculation must be the same in order to compare apples with apples. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "JBookTrader" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/jbooktrader?hl=en -~----------~----~----~----~------~----~------~--~---
