What is Sharpe? Is it useful beyond finance? (opens in new tab)

Click Activate above to run the code cells in this post. This post covers the widely used, but often misunderstood Sharpe ratio. You must have heard this term in some finance / quant lingo: “Our strategy has a Sharpe of 2” or something like: “We don’t run anything with Sharpe < 1.5 on our books”. Well, what does this actually mean? The Sharpe ratio measures how much return you earn per unit of volatility. Formally, [ \text{Sharpe} = \frac{\mu - r_f}{\sigma} ] where $\mu$ is the mean return of...