Published 2026-10-14 · Updated 2026-10-25
Sharpe ratio
The Sharpe ratio expresses return per unit of volatility. It is widely quoted and easy to inflate — a backtest with unusual trades or smoothed returns can produce a high Sharpe that does not survive.
On this page
What it is
The Sharpe ratio expresses return per unit of volatility — a way of asking “how much return for how much bumpiness”.
It is the most commonly quoted single number about a strategy. It is also one of the easiest to distort.
How it gets inflated
| Way | Why it inflates |
|---|---|
| Too-short windows | Volatility measured over too short a period |
| Smoothed returns | Illiquid assets priced by formula lower apparent volatility |
| Unusual trades | A few lucky outcomes raise the mean more than the deviation |
| Costs left out | Costs raise volatility in reality, not in the backtest |
How to check
Ask what the volatility estimate used, and over what window. A Sharpe ratio without its assumptions is not a measurement — it is a claim.