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I am wondering if a couple of the ratios in the systems test report
need another look at their usefulness, namely Sharpe and K-ratio. How
many people find them useful and how many do not? Perhaps the two
measures mentioned below would be more useful?
In the course of backtesting, I sometimes look at the Sharpe and K-
ratios. Up to now i haven't been tracking them closely, being more
concerned with Payoff and a couple of others. My impression has been
that the better the Payoff or Profit ratio in conjunction with
tighter stops, for much the same NP%, the worse the Sharpe ratio!
Further even tho' the backtesting seems ok for the watchlist i am
selecting (top stocks), the K-ratio never gets off the ground, and
the sharpe ratio is only slightly correlated with better payoff or
profit ratios.
Here are a couple of rows out of 30 different backtests.
Unfortunately I didn't keep the stop and other data.
name Run # NP % Exposure
% CAR Max.
Sys %
DD CAR /MDD
Profit
Factor
Payoff
Ratio
Sharpe K-Ratio on next line
A 16 101.9 79.28 17.77 -8.35 2.13 6.46 2.75
0.38 0.08
B 30 95.9 70.7 16.02 -10.08 1.59 3.29 4.31
-0.15 0.06
average 93.15 73.37 15.91 -11.72 1.55 9.81 3.52
0.2 0.07
On the other hand, Expectancy, and the Sortino ratio do appear
useful. Expectancy has been given some attention in this forum.
Paraphrasing something I got off the web:
The Sortino Ratio is similar to the Sharpe Ratio, except that instead
of using standard deviation as the denominator, it uses Downside
Deviation or "Disappointment", being the
(Portfolio Return
minus the
Minimum Acceptable Return (which is the Risk Free Rate))/(Deviation
below the MAR).
At http://www.sortino.com/htm/Sortino%20Ratio.htm
S. Satchel wrote->
"I would like to make it clear that it was not my idea to call
this
the Sortino ratio. It was Brian Rom's idea at Investment
Technologies. This came out of research I did in the early 80's.
The first reference was in the Financial Executive Magazine, August
1980. The first calculation was in the Journal of Risk Management,
September 1981. I think it was an improvement then in that it
measured risk as deviations below the investor's MAR. The numerator
measured return in excess of the MAR. Thus it is goal oriented in
that it measures performance relative to the goal the investor is
trying to achieve instead measuring performance relative to the
market. In that respect I believe it is better than the Sharpe ratio
or the information ratio which measure how well one is doing relative
to the t-bill rate and market index respectively"
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