What is the problem with using the Sharpe measure for evaluation of an active portfolio management strategy?

Answer:

Sharpe ratio is the ratio of difference between expected return and risk free return with standard deviation of return

There are following problems with Sharpe measure for evaluation of an active portfolio management strategy:

a) It is dependent on trading time intervals. It assumes that trading outputs are not related with each other which may not always be the case

b) Sharpe ratio fails to acknowledge the difference between consecutive loss/profit and nonconsecutive loss/profit which may not be ideal for active portfolio management

c) Sharpe ratio measures the volatility of a stock and not the risk associated with it. It cannot count for fluctuations in both up and down directions

d) Sharpe ratio assumes that the volatility is normally distributed. Market trends are much more complicated and random hence sharpe ratio fails to account for the randomness