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> Chande's relation here is 1956, much less so you would reject this
> version.
The Sharpe of those two equity curves also favors the first one.
Why? The second one makes more money, but it does it in a less-
consistent way. The Sharpe ratio prefers steady growth. So do
most money managers & big investors, which is why the Sharpe
ratio is such a good measure for them. If you're more interested
in absolute growth than in how bumpy a ride it is on the way,
Sharpe might not be your best bet.
Sharpe calculation: the avg % growth for the second curve is
about 4.5x larger than the avg growth for the first one,
reflecting the higher return. But the standard deviation of the
second curve is about 5.6x larger, as a result of the "bumpy"
equity curve. Sharpe is calculated as
annualizing_constant * average_growth / stddev_of_growth
...so the larger stddev results in a smaller Sharpe. If return
is more important to you than steady growth, you could "roll your
own" version of the Sharpe that weights the return more heavily.
Maybe something like
annualizing_constant * average_growth^X / stddev_of_growth
X = 1 gives you standard Sharpe. X=1.15 gives the two equity
curves about the same score. X > 1.15 gives the second curve a
higher score.
Gary
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