Annualize a weekly Sharpe of 0.20

Question

A strategy's weekly returns give a Sharpe ratio of 0.20 per week. Assume 52 weeks per year and independent weekly returns. What is the annualized Sharpe ratio?

Accepted Answer

The scaling rule. Multiply the per-period Sharpe by the square root of the number of periods per year: SR{	ext{annual}} = SR{	ext{period}} 	imes \sqrt{k}. Here k = 52 weeks. Why the square root. Over 52 independent weeks, the average return grows by a factor of 52 while the volatility grows only by \sqrt{52}. The Sharpe, being return over volatility, therefore scales by \sqrt{52}. Plug in the numbers. SR{	ext{annual}} = 0.20 	imes \sqrt{52} = 0.20 	imes 7.211 \approx 1.44. Interpretation. A weekly Sharpe of 0.20 annualizes to about 1.44. One caution: the \sqrt{k} rule assumes returns ar…

Annualize a weekly Sharpe of 0.20

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