Sharpe ratio making sense when Central Limit Theorem given

Question

How is Sharpe ratio making sense when Central Limit Theorem is valid?

Answer 1

We also recognize from the Central Limit Theorem that when you have various investments all that matters is the mean and the standard deviation. Therefore, as long as the CLT is valid the Sharpe ratio makes sense.

The Sharpe ratio has been criticized for attaching equal weight to upside ‘risk’ as downside risk because the standard deviation incorporates in both its calculation. It may be important when returns are much skewed.