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A note on the evaluation of long-run investment decisions using the sharpe ratio

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  • Ken Johnston

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  • John Hatem

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  • Elton Scott

    ()

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    Abstract

    This paper reexamines the use of the Sharpe ratio to measure the performance of large and small company stocks along with corporate bonds over different holding periods. It builds on previous research which cites the effects of serial correlation and non-normality in the creation of estimation error in the calculation of the Sharpe ratio. It finds that higher order moments such as skewness and kurtosis are a further source of error that must be accounted for when making inferences about asset performance. Copyright Springer Science+Business Media, LLC 2013

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    File URL: http://hdl.handle.net/10.1007/s12197-011-9213-8
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Economics and Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 1 (January)
    Pages: 150-157

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    Handle: RePEc:spr:jecfin:v:37:y:2013:i:1:p:150-157

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    Web page: http://link.springer.de/link/service/journals/120857/index.htm

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    Related research

    Keywords: Sharpe Ratio; Investment Horizon; Serial Correlation;

    References

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    1. James M. Poterba & Lawrence H. Summers, 1989. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
    2. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
    3. Haim Levy, 1972. "Portfolio Performance and the Investment Horizon," Management Science, INFORMS, vol. 18(12), pages B645-B653, August.
    4. Norman Strong & Nicholas Taylor, 2001. "Time Diversification: Empirical Tests," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(3-4), pages 263-302.
    5. Yong Bao, 2009. "Estimation Risk-Adjusted Sharpe Ratio and Fund Performance Ranking under a General Return Distribution," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(2), pages 152-173, Spring.
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