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Sharpe Ratio Enhancements

Steve LeCompte | | Posted in: Big Ideas

The Sharpe ratio is the most widely used measure of investment efficiency. Is it truly reliable? In their September 2025 paper entitled "How to Use the Sharpe Ratio", Marcos Lopez de Prado, Alexander Lipton and Vincent Zoonekynd review the shortcomings of conventional Sharpe ratio analysis and tackle these issues via several corrections. They also address the problems of statistical error and false discovery rates. Using theoretical analysis and Monte Carlo simulations, they conclude that:

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