core practice · implementation task
Sharpe ratio and max drawdown
Given 252 daily returns with mean 0.04%/day and σ=1%/day (rf=0), compute annualized Sharpe. Equity curve peaks at 1.20 then troughs at 0.95 — max drawdown?
The mechanism
Sharpe = excess return per unit vol. Drawdown = peak-to-trough pain. Correlation matrix shows diversification.
Expected evidence
Sharpe ≈ (0.0004×252)/(0.01×√252) ≈ 0.63. Max DD = (0.95−1.20)/1.20 ≈ −20.8%.
Try this drill in the practice workspace →
Hints when you need them
- Annualize mean×252, vol×√252.
- Drawdown from running peak.
Watch for these mistakes
- Sharpe on tiny samples
- Ignoring costs
- Different leverage comparisons