The Sharpe ratio is a measure of risk-adjusted return that is commonly used in finance to evaluate the performance of an investment or a portfolio. It compares the excess return of an investment (the return in excess of the risk-free rate) to its standard deviation, which is a measure of the volatility or risk of the investment.
The Sharpe ratio can be useful when looking for a seasonal opportunity in financial markets because it allows you to assess the potential return of the opportunity relative to the risk involved. A higher Sharpe ratio indicates that an investment has provided a higher return for the level of risk taken, whereas a lower Sharpe ratio suggests that the investment has not been as effective at generating a return for the risk taken.
Therefore, when looking for a seasonal opportunity in financial markets, it can be helpful to consider the Sharpe ratio as a way to compare the potential returns and risks of different opportunities and make more informed decisions about where to allocate your capital.
Seasonal Opportunity with a High Sharpe Ratio of 3.99
When Sharpe Ratio is very large, 3.99 in the above case, the Yearly Profit Bars show consistent return.
Seasonal Opportunity with a Low Sharpe Ratio of 0.69
In both cases the date range was a winner 10 of 10 years, however, when Sharpe Ratio is low, 0.69 in the above case, the Yearly Profit Bars show inconsistent returns from year to year. About 50% of the average profit above is from 2013 and 2014 alone, while for the next 8 years, the average profit drops from 8% to only 4%. Because of the inconsistent return and lower Avg Profit, this opportunity has a lower Sharpe Ratio.