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How to Trade
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Fixing Account Errors
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Case Study: 2019 Credit-Suisse Results
What is a Stock?
How to Choose a Stock
Active Trading vs Portfolio Management
How to start testing multiple strategies
What is an ETF?
How to Choose ETFs
What is short selling?
What is a Bond?
What is an Option?
What is Portfolio Management Strategy?
What is Diversification?
What is the Diversification Score?
How to Build a Basic ETF Portfolio
What are asset-classes?
What is Industry Exposure?
What is Geopolitical Exposure?
How to read impact on diversification
What is Volatility?
What is Return?
What is Sharpe Ratio?
How to Improve Sharpe Ratio
How do I measure risk?
What are average excess returns?
What is a good Sharpe Ratio?
Host your own EquitySim Challenge
Can users share an account?
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Challenge Setting Types
How does EquitySim compare to other simulations?
What are Trading Strategies?
What are some basic Financial Vocabulary?
Recording your Strategies and Rationales
What is EquitySim?
Can I undo a trade?
How are prices determined in the simulation?
Why didn't my trade execute immediately?
How do I exchange currency?
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What are Public Portfolios?
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How are Options priced in the simulation?
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How our simulations reflect the real-world
What can I trade on EquitySim?
What is a good rationale?
How to set-up your team
What are the different order types?
Which government bonds can I trade?
Sharpe Ratio measures your ability to create a larger return than your volatility.
A principle of investing is that there is a connected relationship between generating returns (profit) and taking risks. Sharpe Ratio is a formula that measures whether your returns are large enough to compensate for the amount of risk you are taking.
Sharpe Ratio - The Math
Sharpe Ratio Formula = (Average Portfolio Returns – Risk-Free Rate) ÷ Volatility
Average Portfolio Returns: The average of all your daily returns
Risk-free rate: The Daily return of the 3-month US Treasury Bill
Volatility: Standard deviation of daily portfolio returns
We built this calculator to help you visualize it better:
Tips to Keep in Mind
Tip #1: Remember that Sharpe Ratio uses your "average return" not your total returns. This means that how you perform each day matters. Set daily goals.
Tip #2: Master volatility. The volatility of your portfolio is easier to predict and control than the potential returns of your portfolio. If you can actively manage your volatility you are halfway through maximizing your Sharpe ratio.
Tip #3: Aim for consistency over one-time large gains. Sharpe Ratio rewards those who have a consistent pattern of generating returns over those making money due to a few big decisions.
Professionals should be able to generate a Sharpe Ratio of 2. On EquitySim aim for a Sharpe ratio that is greater than 0.5. This will not be a simple challenge, as less than 0.1% of EquitySim users can do this consistently.
note: Sharpe Ratio less than - 5.0, and greater than 5.0 is considered as system miscalculations and will show us as N/A.
To learn more about Sharpe Ratio you can reference these articles: