Sharpe Ratio
The Sharpe Ratio measures excess return per unit of total volatility, giving a single number for comparing strategies with different risk profiles.
The math
S = ((R_p − R_f) / σ_p) × √252R_p = mean per-period (daily) portfolio return, R_f = risk-free rate (0% in Pancake), σ_p = per-period standard deviation of returns (Bessel-corrected). The √252 factor annualizes the daily Sharpe by the trading-day convention (Sharpe 1994).
Why it matters
A Sharpe above 1.0 is generally considered acceptable; above 2.0 is strong for a live trading strategy. Because it annualizes volatility, it lets you compare a high-frequency strategy to a monthly-rebalance one on the same scale. Pancake uses Sharpe as the primary ranking metric when comparing strategies.
Sharpe treats upside and downside volatility equally — a strategy that occasionally spikes up is penalized the same as one that spikes down. It also assumes returns are roughly normally distributed, which prediction-market payoff profiles often violate. Use Sortino alongside Sharpe for a fuller picture.
Published source
Sharpe, W. F. (1994). "The Sharpe Ratio." Journal of Portfolio Management, 21(1), 49–58.