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Deflated Sharpe Ratio (DSR)
QuantA correction to the Sharpe ratio that adjusts for the number of trials, the distribution of returns, and the skew/kurtosis of the strategy. Tells you whether a high Sharpe is real or a multiple-testing artifact.
Full definition
The Deflated Sharpe Ratio (Bailey & López de Prado, 2014) adjusts the observed Sharpe for: (1) the number of trials run (multiple-testing correction), (2) the non-normality of returns (skew and kurtosis), and (3) the correlation between strategies in the trial set. A backtest Sharpe of 1.5 that emerged from a 50-trial search is much less impressive than the same Sharpe from a single test. On this site, DSR is gate G21 of the G1 to G31 evaluation stack. every quant project reports DSR alongside the raw Sharpe so the recruiter can tell signal from search.
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