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A note on why doesn't the choice of performance measure matter?

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  • Guo, Biao
  • Xiao, Yugu

Abstract

Choosing an appropriate performance measure is important for fund investors, nevertheless, many researchers find empirically that the choice of measures does not matter because those measures generate identical rank ordering, even though the distribution of fund returns is non-normal. In this paper we certify their findings by proving the monotonicity of several widely used performance measures when the distribution is a location-scale family. The mutual fund monthly return data from 1997 to 2015, together with simulation results, collaborate with our proof.

Suggested Citation

  • Guo, Biao & Xiao, Yugu, 2016. "A note on why doesn't the choice of performance measure matter?," Finance Research Letters, Elsevier, vol. 16(C), pages 248-254.
    • Handle: RePEc:eee:finlet:v:16:y:2016:i:c:p:248-254
    DOI: 10.1016/j.frl.2015.12.001
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    References listed on IDEAS

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    Cited by:

    1. León, Angel & Navarro, Lluís & Nieto, Belén, 2019. "Screening rules and portfolio performance," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 642-662.
    2. Niu, Cuizhen & Wong, Wing-Keung & Xu, Qunfang, 2017. "Higher-Order Risk Measure and (Higher-Order) Stochastic Dominance," MPRA Paper 75948, University Library of Munich, Germany.
    3. León, Angel & Moreno, Manuel, 2017. "One-sided performance measures under Gram-Charlier distributions," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 38-50.
    4. Lu, Jin-Ray & Li, Xiu-Yan, 2021. "Identifying the fair value of Sharpe ratio by an option valuation approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 63-70.
    5. Cuizhen Niu & Wing-Keung Wong & Qunfang Xu, 2017. "Kappa ratios and (higher-order) stochastic dominance," Risk Management, Palgrave Macmillan, vol. 19(3), pages 245-253, August.
    6. Auer, Benjamin R., 2018. "A note on Guo and Xiao's (2016) results on monotonic functions of the Sharpe ratio," Finance Research Letters, Elsevier, vol. 24(C), pages 289-290.
    7. Richard Lu & Adrian (Wai Kong) Cheung & Vu T. Hoang & Sardar M. N. Islam, 2021. "Which measure of systematic risk should we use? An empirical study on systematical risk and Treynor measure using the economic index of riskiness and operational measure of riskiness," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 1739-1744, April.

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    More about this item

    Keywords

    Performance measurement; Rank correlation; Sharpe ratio; Fund evaluation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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