Quant · Core
Sharpe Ratio
The Sharpe ratio is excess return per unit of total volatility — a ranking statistic that hates fat tails and loves the last sample.
Definition
S = (E[r] − r_f) / σ. Annualize carefully. It treats upside and downside vol the same and assumes the mean is knowable. High Sharpe with hidden tail risk is a short-vol costume.
Why it matters
Allocators sort on it. Managers optimize it. Both can be gamed with smoothing, options, and a short sample.
Case
A short-vol sleeve with Sharpe 2.4 for five quiet years. Year six is −8 Sharpes in a month. The ratio was the quiet, not the edge.
How to read it
Sample length, return definition (net of costs), and a tail statistic next to it (Sortino, max DD, ES).
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Mutual Fund PerformanceSharpe · 1966 · Journal of BusinessThe original Sharpe ratio paper.
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