Annualizing Sharpe Ratios for Quarterly Trading Strategies

Summary

The document discusses how to annualize the Sharpe ratio of a strategy that makes quarterly trades. The question proposes scaling the average trade return by the standard deviation of trade returns and multiplying by the square root of the number of trades per year. One response recommends measuring the portfolio’s daily log returns over its full history, calculating daily mean return and volatility, and annualizing those statistics with the conventional trading-day factors before applying the Sharpe formula.

A second response assumes a fixed return per trade, compounds it across the year to estimate annual return, and scales trade volatility by the square root of the annual trade count. These answers illustrate that compounding can affect annual return estimates and that performance measurement should be distinguished from the strategy’s trading or rebalancing frequency. The discussion is brief and does not resolve every convention, including risk-free-rate alignment, serial dependence, or whether trade returns adequately represent portfolio-level returns.

Key ideas

• One suggested approach computes portfolio returns and volatility at a daily frequency before annualizing them.
• Another approach compounds a constant per-trade return to estimate annual return.
• Volatility is scaled by the square root of the number of periods under the stated approach.
• The answers do not discuss adjustments for serial correlation or all risk-free-rate conventions.

Tags

# Calculating Annualized Sharpe Ratio


# Calculating Annualized Sharpe Ratio












I'm calculating the annualized Sharpe Ratio for a strategy with quarterly trades and would appreciate your input on my approach:

Trades per year: 4 Average return per trade: 1.6% Standard deviation of returns: 2.2% Annualized Sharpe Ratio formula used: ((1.6% - risk-free rate) / 2.2%) * SQRT(4) Resulting in a Sharpe Ratio of 1.44.

Questions:

Is this the correct method to annualize the Sharpe Ratio for quarterly trading?

Thank you for your insights.

## Answer by KaiSqDist (score 2)

https://quant.stackexchange.com/a/78842

Hi and welcome to the forum.

For performance analytics, the correct way would be to take the whole duration of your portfolio and compute the average daily return and daily volatility (from the log returns). Then you can annualize both metrics with $252$ and $\sqrt{252}$ respectively.

Once done, you can compute the annual Sharpe ratio with your formula (together with the riskless rate).

Another way of saying this is - the computation for the performance analytics should be independent of your rebalancing strategy. Whether you do daily, weekly, fortnightly etc. The performance analytics computation is the same.

## Answer by deb (score -1)

https://quant.stackexchange.com/a/78853

Let's assume you had exactly 1.6% return per trade. Then your annualized return = (1+0.016)^4-1=~6.555%

Your annualized stdev = 0.022*sqrt(4)=0.044

Then your sharp ratio = (0.06555-rf)/0.044

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.