Volatility & Sharpe

What you'll learn

• ✓Compute volatility
• ✓Compute Sharpe ratio

Lessons

1. 🎢
   Two Paths to 8 Percent

   Same destination, very different ride
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2. The Standard Wobble Metric

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3. Reward Per Unit of Wobble

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4. Cousins of the Sharpe

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5. Sharpes in the Wild

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6. Boss Round: Read the Number Critically

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Sources

All content is drawn from the sources below. We deliberately avoid unverified material.

• Mutual Fund Performance (1966)
  William F. Sharpe, Journal of Business, vol. 39 no. 1 part 2, pp. 119 to 138 · academic
  The original Sharpe ratio, introduced as the 'reward-to-variability ratio'. Source for lesson 3 history and the formula.
  https://www.jstor.org/stable/2351741
• The Sharpe Ratio (1994)
  William F. Sharpe, Journal of Portfolio Management, Fall 1994 · academic
  Sharpe's own 1994 follow-up clarifying the ex-ante and ex-post definitions. Used in lessons 3 and 6.
  https://web.stanford.edu/~wfsharpe/art/sr/sr.htm
• Performance Measurement in a Downside Risk Framework (1994)
  Frank A. Sortino and Lee N. Price, Journal of Investing, Fall 1994 · academic
  Original Sortino ratio definition. Source for lesson 4.
• The Statistics of Sharpe Ratios (2002)
  Andrew W. Lo, Financial Analysts Journal, July/August 2002 · academic
  Statistical caveats on Sharpe estimates: short samples, autocorrelation, skew, and the LTCM example. Backbone of lessons 5 and 6.
  https://www.cfainstitute.org/en/research/financial-analysts-journal
• Buffett's Alpha (2018)
  Andrea Frazzini, David Kabiller, Lasse H. Pedersen, Financial Analysts Journal, vol. 74 no. 4 · academic
  Source for the long-run Berkshire Hathaway Sharpe figure used in lesson 5 (around 0.76 since 1976).
  https://www.tandfonline.com/doi/abs/10.2469/faj.v74.n4.3
• When Genius Failed: The Rise and Fall of Long-Term Capital Management
  Roger Lowenstein, Random House 2000 · book
  Narrative source for the LTCM 1996 reported Sharpe and the 1998 collapse used in lesson 5.
• Investments
  Zvi Bodie, Alex Kane, Alan J. Marcus, McGraw-Hill · book
  Standard textbook. Source for the standard deviation recipe, the square-root-of-252 annualization, and the Sharpe ratio definitions across lessons 2 to 4.