A decision-theoretic foundation for reward-to-risk performance measures
AbstractIn 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 36 (2012)
Issue (Month): 7 ()
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Web page: http://www.elsevier.com/locate/jbf
Asset management; Performance measurement; Sharpe ratio; Location and scale condition; Risk and reward measurement;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- 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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