With the ever-increasing use of virtual currency and its volatility, cryptocurrencies are being adopted across the world for various transactions. Cryptocurrency derivatives trading is a new trading area that many daytime traders are interested in. In this article, we will give you the basics introduction of what is Sharpe ratio and the two basic problems with the Shape ratio，so you may have a deeper understanding of it.
What is the Sharpe ratio
The Sharpe ratio is the most widely used risk-adjusted return measure. The Sharpe ratio is defined as the average excess return divided by the standard deviation. Excess return is the return above the risk-free return
There are two basic problems with the Sharpe ratio
First one is the return measure which is based on average rather than compounded return. The return an investor realizes is the compounded return, not the average return. The more volatile the return series, the more the average return will deviate from the actual return.
The second one is that the Sharpe ratio does not distinguish between upside and downside volatility. The risk measure inherent in the Sharpe ratio—the standard deviation—does not reflect the way most investors perceive risk.
Investors care about loss, not volatility. They are averse to downside volatility but actually like upside volatility. Have you
ever meet any investors who complained because their managers made too much money in a month.
The standard deviation, and by inference the Sharpe ratio, however, makes no distinction between upside and downside volatility. This characteristic of the Sharpe ratio can result in rankings that would contradict most investors’ perceptions and preferences.
Thanks for your time, after reading this article, you may have
a deeper understanding of what ratio and the two basic problems with the Sharpe ratio. It was an honor to share the experience of cryptocurrency derivatives trading with you. In the next time, we will discuss what is Sortino ratio and Gain-to-pain ratio. For more information, please follow all of our newest articles on Bybit.
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