how do you quantify your performance

[FullyArticulate]

Quote from Profitaker:

No reason why you couldn't look at the Sharpe ratio for each and every one of your strategies, as well as your overall performace.

Sure, all I'm saying is that it's not as useful to me. On my earnings strategy, I lose 71% of the time, or make 4x my average loss 29% of the time. My standard deviation is pretty big just by the nature of the strategy. That doesn't mean I'd ditch it because it has a low Sharpe ratio.

Measuring against the risk-free rate should be an integral part of all trader's performance metrics, however. Particularly option traders (you're "paying for" risk free on every option anyway).

 

[IV_Trader]

Quote from Profitaker:

Doesn't he run a fund ? If so wouldn't that info be publicised ?

yes , he had a fund , so this info probably available (was) somewhere. I know that everyone will disagrees with me , but I cannot understand how retail trader can use someone's else apps to quantify his own performance. Of shelf apps - one fits it all ? hmmm
Take a look how IB displays VaR on individual stocks long ( short ) combo.
They are probably ( not sure and don't care) basing it on Beta. What about :

bankruptcies
buyout
2000 bp overnite drop in vols
5000 ( ! ) one day ramp in vols for bio's and court hearings.

So an owner of short combo on XYZ should sleep well because IB's sophisticated VaR shows no more than 3.4% as a "worst case" ?

 

[Profitaker]

Quote from IV_Trader:

I cannot understand how retail trader can use someone's else apps to quantify his own performance. Of shelf apps - one fits it all ? hmmm

Don't follow that, please explain.

 

[yip1997]

Quote from Profitaker:

The sharpe ratio measures your risk adjusted return.

Sharpe ratio = (Return – risk free return) / Portfolio Standard Deviation

You would need your daily portfolio P&L data for (I would suggest) 3 months or more so that the data would be meaningful.

You should strive for a Sharpe ratio > +1.

Portfolio daily P&L is not accurate because of the bid ask spread. Do you use the worst case, or mid as your daily P&L data? It deviates a lot. Say for example, after I just open a position, I will see a drop in my daily p&l because of the bid ask spread.

Sharpe is good for a very diversified portfolio, and it is hard to achieve a sharpe ratio of 1 for a very concentrated portfolio.

I believe sharpe ratio is a way to measure how well you diversify your porfolio.

 

[IV_Trader]

I was really surprised to find it (from Taleb):
"It's a scam, all of it -- Markowitz, Sharpe, it's just like astrology"

 

[yip1997]

Quote from IV_Trader:

I was really surprised to find it (from Taleb):
"It's a scam, all of it -- Markowitz, Sharpe, it's just like astrology"

Yes, I remembered Mav mentioned it before.

 

[yip1997]

Quote from Profitaker:

You should strive for a Sharpe ratio > +1.

Do you mean a daily sharpe ratio of 1 or annual sharpe ratio of 1? There two differs by a multiple of around 15.

 

[Profitaker]

Quote from yip1997:

Portfolio daily P&L is not accurate because of the bid ask spread.

That shouldn’t make any difference to “accuracy” because the spread after all, is part of trading life.

Quote from yip1997:

Do you use the worst case, or mid as your daily P&L data?

It depends. If it’s a liquid option I’ll take the worst case, if it’s illiquid with wide spreads I’ll take the mid (knowing I can improve on the worst case).

Quote from yip1997:

It deviates a lot. Say for example, after I just open a position, I will see a drop in my daily p&l because of the bid ask spread.

Yes you will see a drop, but as I said, that’s life. The actual drop should be small, unless the new position is massive, in which case you’ll want that to show up anyway. After all we are measuring a risk / return.

Quote from yip1997:

Sharpe is good for a very diversified portfolio, and it is hard to achieve a sharpe ratio of 1 for a very concentrated portfolio.

I believe sharpe ratio is a way to measure how well you diversify your porfolio.

Diversified or concentrated doesn’t make any difference because you are measuring a portfolio’s risk adjusted return. You are normalising returns against their associated volatility. In other words, a diversified (less risky) portfolio, would need a larger return than would a concentrated (more risky) portfolio to achieve the same Sharpe.

Quote from IV_Trader:

I was really surprised to find it (from Taleb):
"It's a scam, all of it -- Markowitz, Sharpe, it's just like astrology"

A lot of people think Taleb is a lunatic. I wouldn’t go that far, but for all his rants on Sharpe, VaR etc, he has yet to come up with a better alternative !

Quote from yip1997:

Do you mean a daily sharpe ratio of 1 or annual sharpe ratio of 1? There two differs by a multiple of around 15.

Calculate a Sharpe using your daily PnL data. The actual time period is of your choosing, but I would suggest using a minimum of 3 months daily data.

 

[yip1997]

Quote from Profitaker:
Calculate a Sharpe using your daily PnL data. The actual time period is of your choosing, but I would suggest using a minimum of 3 months daily data. [/B]

You misunderstood my question. I understand you use the daily data. Do you annualize it, and hope the Sharpe ratio > 1?

[edit] Using 6 months data, the ratio of 1-day excess mean return to 1-day standard deviation is around 0.1.

So the annual Sharpe ratio is around 15*0.1 = 1.5.

Since there are around 256 trading days, and 365 days for interest rate, I use 256 as a simplified way to compute the ratio.

Do I have it right this time?

 

[Profitaker]

yip

You take the sandard deviation of your daily returns. Then, since these are daily returns, you multiply it by the square root of 252 (maybe 256 for the yanks). This will then give you the "annualised" volatility.