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Beyond the Sharpe ratio: An application of the Aumann–Serrano index to performance measurement

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  • Homm, Ulrich
  • Pigorsch, Christian

Abstract

We propose a performance measure that generalizes the Sharpe ratio. The new performance measure is monotone with respect to stochastic dominance and consistently accounts for mean, variance and higher moments of the return distribution. It is equivalent to the Sharpe ratio if returns are normally distributed. Moreover, the two performance measures are asymptotically equivalent as the underlying distributions converge to the normal distribution. We suggest a parametric and a non-parametric estimator for the new performance measure and provide an empirical illustration using mutual funds and hedge funds data.

Suggested Citation

  • Homm, Ulrich & Pigorsch, Christian, 2012. "Beyond the Sharpe ratio: An application of the Aumann–Serrano index to performance measurement," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2274-2284.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:8:p:2274-2284
    DOI: 10.1016/j.jbankfin.2012.04.005
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    More about this item

    Keywords

    Performance measurement; Sharpe ratio; Aumann–Serrano index of riskiness; Skewness; Kurtosis; Non-normality;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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