How to Improve Sharpe Ratio

To improve Sharpe Ratio you'll need to first increase your depth in understanding it. Sharpe ratio is comprised of two main components: 

(1) Volatility: Sharpe Ratio tries to even out the fact that if you’re taking a lot of risk in your portfolio, you would have to a large enough return to justify that risk. 

Read more here.

(2) Average Return: On EquitySim we take the daily change between each day, and take the average of those returns.

Read more here.

Sharpe Ratio - Where to Start?

Volatility is easier to predict than future returns.

On EquitySim, volatility considers a security's daily return for the last 90 trading days. The average return is the average of those inputs. A securities volatility usually stays consistent over fixed time frames.

Unlike Volatility, historical returns are NOT a good indicator of the future returns of an investment. This is where your skill comes into play, the job of an active manager to choose which investments will outperform.

Start by managing your volatility.

1) Set a daily volatility goal you'd like your portfolio to achieve

2) Find investments that help you achieve these goals

The volatility filter can be used here (sometimes found under advanced filters):

Volatility is categorized by 3-month volatilities.

3) Leverage Limit orders to cap the volatility of your holdings:

4) Launch your "targetted volatility" strategy and let it run on the simulation

5) Export and analyze your Sharpe ratio data

Once you have volatility figured out you can then start examining your return patterns and how both volatility and return work together in Sharpe Ratio.

How did we do?

What are average excess returns?

How do I measure risk?