Curriculum/deflated-sharpe-ratio

Deflated Sharpe Ratio

statistics·L2 · idiom·stub

Replacesthe belief that high Sharpe equals real edge.

Bailey & López de Prado's Deflated Sharpe Ratio adjusts the observed Sharpe for (1) the number of trials run, (2) non-normality of the return distribution (skew + kurtosis), (3) the variance of the Sharpe estimator. A naive Sharpe 2.0 from 1000 trials and a Sharpe 1.5 from 5 trials can deflate to the same — or to the opposite. The single highest-leverage gate in quant research.

Prerequisites

Unlocks—

Bridges

backtest-pitfallsmodel to implementation
DSR is the gate the Stage 4 backtest should pass before any strategy is taken seriously. The Stage 4 lab feeds two strategies through DSR — one real, one data-mined — and watches the deflation filter the fake out.
deflated-evaluation-protocolimplementation to model
The DSR mechanism generalises to any backtest evaluation: deflate the headline metric by the number of trials and the variance of the estimator. The Stage 8 ML curriculum applies the same idea to PBO and combinatorially symmetric cross-validation (CPCV).

Status

This concept is a node in the curriculum DAG. The full lab — page blocks, done state, references — has not been authored yet. The relations above describe where it sits in the graph.

Author at: content/concepts/deflated-sharpe-ratio/card.ts