How long to trust a Sharpe of 0.6?

Question

A strategy's live track record shows an annualized Sharpe ratio of $0.6$ .

How many years of data do you need for this to be statistically significant (t-stat of about $2$ )? And what Sharpe would let you clear the bar in just one year?

Accepted Answer

Sharpe times root-years is the t-stat. For i.i.d. returns, the t-statistic for "mean return = 0" equals the annualized Sharpe scaled by the square root of the track-record length in years: t = \widehat{SR}{	ext{ann}}\,\sqrt{T}. Years needed. Requiring t \ge 2: 0.6\,\sqrt{T} \ge 2 \implies \sqrt{T} \ge \frac{2}{0.6} = 3.33 \implies T \ge 11.1 	ext{ years}. A Sharpe-0.6 strategy needs about 11 years of live data before its edge is distinguishable from zero at the usual level, versus only 4 years for a Sharpe-1 strategy. The quadratic T \approx (2/SR)^2 is punishing: lowering the Sharpe from 1…

How long to trust a Sharpe of 0.6?

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