How many years to trust a Sharpe ratio?
Asked at Point72, Squarepoint
A strategy's live track record shows an annualized Sharpe ratio of 1.0.
How many years of data do you need for this to be statistically significant at the usual 5% level (t-stat of about 2)? Derive the link between the Sharpe ratio and the t-statistic, and the standard error of the Sharpe estimate.
Show a hint
Write the t-statistic for "mean return = 0" using per-period mean and standard deviation, then express it in terms of the annualized Sharpe ratio and the track-record length in years.