Sharpe Ratio
Measures return per unit of risk — the higher, the better the strategy.
Sharpe ratio is a statistical measure quantifying investment return relative to risk taken.
Formula: (Portfolio Return − Risk-Free Return) / Standard Deviation
Interpretation:
•< 1: poor — taking too much risk for the return
•1–2: good
•2–3: excellent
•> 3: exceptional (rare, usually indicates error or short history)
Example:
•BTC historical Sharpe ~0.8–1.2
•S&P 500 ~0.5–0.7
•Hedge fund average ~0.6
Limitations:
•Standard deviation doesn't distinguish "good" and "bad" volatility
•Short data period gives unrealistic results
•Crypto: Sharpe is high in bull phase, drops sharply in bear phase