Performance Measures for Dynamic Portfolio Management
AbstractThis paper proposes instantaneous versions of the Sharpe ratio and Jensen’s alpha as performance measures for managed portfolios. Both are derived from optimal portfolio selection theory in a dynamic model. The instantaneous Sharpe ratio equals the discrete Sharpe ratio plus half of the volatility of the fund. Hence, it does not penalize fund managers for taking risks as much as the discrete ratio does. This is justified by dynamic portfolio theory. Unlike their discrete versions, the instantaneous performance measures take leverage correctly into account in a dynamic setting, and they take into account investors rebalancing their portfolios over time.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1885.
Date of creation: May 1998
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Find related papers by JEL classification:
- 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
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