A decision-theoretic foundation for reward-to-risk performance measures
Journal
Journal of Banking & Finance
ISSN
0378-4266
ISSN-Digital
1872-6372
Type
journal article
Date Issued
2012-07
Author(s)
Abstract
In this paper we prove that partial-moments-based performance measures (e.g., Omega, Kappa, upside-potential ratio, Sortino-Satchell ratio, Farinelli-Tibiletti ratio), value-at-risk-based performance measures (e.g., VaR ratio, CVaR ratio, Rachev ratio, generalized Rachev ratio), and other admissible performance measures are a strictly increasing function in the Sharpe ratio. The theoretical basis of this result is the location and scale property and two other plausible and mild conditions. Our result provides a decision-theoretic foundation for all these frequently used performance measures. Moreover, it might explain the empirical finding that all these measures typically lead to very similar rankings.
Language
English
Keywords
Asset management
Performance measurement
Sharpe ratio
Location and scale condition
Risk and reward measurement
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
36
Number
7
Start page
2077
End page
2082
Pages
6
Subject(s)
Division(s)
Eprints ID
215379