Eulers


Total Posts: 1 
Joined: Apr 2020 


Using metrics to track performance it has always boggled my mind why sharpe is being used. I mean whats the usecase when return / max DD is the end goal anyways? Using martingale/ higher dimensional momentum scale in/out position sizing, it can go as far to really hurt the “sharpe”. What and why do people use sharpe, whats justified? 
Short the pops and long the drops 



I would say that maximizing terminal utility or CAGR is the end goal and the return / max DD is just another approximation like Sharpe? 
www.coinapi.io && www.cryptotick.com 

kloc


Total Posts: 32 
Joined: May 2017 


Well, there are Stirling and Calmar ratios if you prefer CAGR/DD type of risk metrics?
Not as popular as Sharpe, but they're pretty standard... 



gamerx


Total Posts: 11 
Joined: Sep 2012 


There are many problems with the sharpe ratio, but same goes for other metrics.
Guess it is the preferred one simply because everyone else is using it. Makes performance comparable across the board this way. 



Optimal Kelly sizing is linearly proportional to Sharpe ratio. Therefore for a riskneutral investor in an infinite period game without leverage constraints, logarithmic utility scales quadratically with Sharpe regardless of higher moments.
Optimal logreturns are equal to Sharpe^2. For example a strategy of Sharpe 0.5 can achieve 25% annualized logreturns at optimal leverage. Sharpe 1.0 can achieve 100%. Sharpe 2.5 can achieve 625% returns. Sharpe 0.1 can achieve 1%. Etc.
Another way to think about this is to consider the law of large numbers. Consider period to period returns of an asset as an i.i.d. process. (For any reasonably liquid and efficient asset, some sufficiently large period will have sufficiently small autocorrelation between periods.) In the long run, the investors logwealth converges to a normal random variable. The variance of this "cumulative wealth" variable is linearly dependent on the variance of the assets' return variance. Any higher moments converge to zero.
In other words, for a sufficiently longterm investor without leverage constraints, all risk metrics besides Sharpe become irrelevant. 
Good questions outrank easy answers.
Paul Samuelson 

