Stats › Backtesting and evidence › Sharpe uncertainty
A Sharpe of 1.0 needs 2.71 years of daily data to beat zero
| Annualised Sharpe ratio | Years of daily returns needed |
|---|---|
| 0.5 | 10.83 |
| 1.0 | 2.71 |
| 1.5 | 1.21 |
| 2.0 | 0.69 |
| 3.0 | 0.31 |
Source: Bailey and Lopez de Prado, minimum track record length, daily returns at 95% confidence against a benchmark of zero. The requirement goes with the inverse square of the Sharpe ratio, so halving the Sharpe quadruples the time. Non-normal returns lengthen every row.
A Sharpe ratio is an estimate from a sample, so it carries an error bar. An annualised Sharpe of 1.0 takes about two and three quarter years of daily returns to separate it from zero. At 0.5 it takes nearly eleven years.
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