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Why square root the the denominator, for the Sharpe Ratio?
Why do we take the square root of 250 when calculating the Sharpe ratio? Wouldn't just sec_returns['pg'].std() * 250 give us the annualized standard deviation of PG?
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Hi David!
Thanks for reaching out!
Initially, we calculate the average variance and multiply by the number of trading days in a year (approximated by the value of 250) to obtain the annualized variation of the stock (in this example, "PG").
To obtain the annualized standard deviation, we need to take the square root of the variance (which we do by applying the .std() method). However, we shouldn't forget to take the square root of the value 250, too!
Hope this helps.
Kind regards,
Martin