Economy3 March 20264 min read

Understanding Sharpe Ratio: Is Your Strategy Actually Good?

Returns mean nothing without risk context. The Sharpe ratio tells you if your gains are worth the volatility.

A strategy that returns 50% sounds great until you learn it had 80% drawdowns.

The Sharpe ratio normalizes returns by volatility.

Anything above 1.0 is decent. Above 2.0 is excellent. Below 0.5, reconsider.

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