A 2 bps edge over 2000 trades a year: annual Sharpe?

Question

A high-frequency signal earns an average of 2 basis points per trade, with a standard deviation of 20 basis points across trades, and it makes 2000 independent trades per year.

What annualized Sharpe ratio does this imply?

Accepted Answer

Build annual from per-trade. Over M independent trades, the annual Sharpe is the per-trade Sharpe times the square root of trades per year: SR{	ext{annual}} = \frac{m}{s}\sqrt{M} = s{	ext{trade}}\sqrt{M}. Plug in the numbers. The per-trade Sharpe is s{	ext{trade}} = 2/20 = 0.10, and M = 2000: SR{	ext{annual}} = 0.10 	imes \sqrt{2000} = 0.10 	imes 44.72 \approx 4.47. Interpretation. A modest per-trade Sharpe of 0.10, fired 2000 times a year, yields a spectacular annual Sharpe of about 4.5, the kind of number only high-frequency strategies report. The catch is the independence assumption:…

A 2 bps edge over 2000 trades a year: annual Sharpe?

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