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Situations that could cause upward bias in the calculation of Sharpe ratios are:

February 12, 2018
  • Lengthening the measurement interval resulting in a lower estimate of volatility
  • Compound monthly returns but calculating standard deviation from he not compound returns
  • Writing out-of-the-money puts and calls
  • Smoothing returns
  • Eliminating extreme returns using a total-return swap on the best and worst returns for a fixed cashflow

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