Hi Guys
Have a question on Sharpe ratio and specifically Adjusted Sharpe Ratio. Basically my company is calculating the sharpe ratio for individual traders as follows:
Assume 6 days for the current period (for simplicity in this example) where the trader makes the following Dollar PL: 100k, -60k, 1M, 400k, -90k and -600k. We have a dollarised ANV of 400M so our 6 daily returns are 0.025%, -0.015%, 0.25%, 0.1%, -0.0225% and -0.15%. So for Sharpe we are taking Average of returns and annualizing to get 7.88% as per Excel. for Annualised SD its simply STDEV(returns) * square 252 to get 2.14% so my sharpe (SR) is 3.69
I feel they should also include Skew and Kurtosis here to get a get an Adjusted sharpe ratio as per the work of Pezier (2006) - so for Skew in Excel I get 0.564. My understanding is that the KURT function in Excel is excess kurtosis so this gives me 1.02. So Im converting this to sample kurtosis via a formula I foun don google (Sample Kurtosis = Excess Kurtosis + 3(n-1) squared / (n-2)*(n-3) to give me 7.27 in this case.
However when I plug this into the Adjusted Sharpe RAtio formula I get a bizarre number; the formula I have is ASR = SR * (1+(Skew/6) X SR - (Kurtosis-3/24)*SR squared).
Can someone please check over my workings and method? Im clearly doing something wrong
Bottom line is I want to use an ASR which penalises negative skew and fat tails rather than using a very general Sharpe ratio that my company is currently using - any advice offered would be appreciated as always
Thanks so much
J.