Performance
finml_core.metrics.performance
sharpe_ratio(returns, risk_free_rate=0.0, periods=252)
Calculates the annualized Sharpe Ratio (Ex-post).
The Sharpe Ratio evaluates the risk-adjusted performance of an investment by subtracting the risk-free rate from the investment's return and dividing the result by the investment's standard deviation (volatility).
Mathematical Formula
\[ S = \frac{R_p - R_f}{\sigma_p} \cdot \sqrt{T} \]
Where
- \(R_p\): Average period return.
- \(R_f\): Risk-free rate per period.
- \(\sigma_p\): Standard deviation of period returns.
- \(T\): Annualization factor (e.g., 252 for daily data).
Parameters:
| Name | Type | Description | Default |
|---|---|---|---|
returns
|
Series
|
Time series of asset returns (simple returns recommended). |
required |
risk_free_rate
|
float
|
Annualized risk-free rate (e.g., 0.04 for 4%). Defaults to 0.0. |
0.0
|
periods
|
int
|
Annualization factor. (252 for daily, 12 for monthly). Defaults to 252. |
252
|
Returns:
| Type | Description |
|---|---|
float
|
The annualized Sharpe Ratio. |
Interpretability
- < 1.0: Suboptimal risk-adjusted return.
- 1.0 - 1.9: Acceptable / Good.
- 2.0 - 2.9: Superior / Very Good.
- > 3.0: Exceptional (often seen in High-Frequency Trading).