A Cross-Sectional Performance Measure for Portfolio Management
AbstractSharpe-like ratios have been traditionally used to measure the performances of portfolio managers. However, they are known to suffer major drawbacks. Among them, two are intricate : (1) they are relative to a peer's performance and (2) the best score is generally assumed to correspond to a "good" portfolio allocation, with no guarantee on the goodness of this allocation. Last but no least (3) these measures suffer significant estimation errors leading to the inability to distinguish two managers' performances. In this paper, we propose a cross-sectional measure of portfolio performance dealing with these three issues. First, we define the score of a portfolio over a single period as the percentage of investable portfolios outperformed by this portfolio. This score quantifies the goodness of the allocation remedying drawbacks (1) and (2). The new information brought by the cross-sectionality of this score is then discussed through applications. Secondly, we build a performance index, as the average cross-section score over successive periods, whose estimation partially answers drawback (3). In order to assess its informativeness and using empirical data, we compare its forecasts with those of the Sharpe and Sortino ratios. The results show that our measure is the most robust and informative. It validates the utility of such cross-sectional performance measure.
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Bibliographic InfoPaper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 10070.
Length: 32 pages
Date of creation: Aug 2010
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Performance measure; portfolio management; relative-value strategy; large portfolios; absolute return strategy; multivariate statistics; Generalized Hyperbolic Distribution.;
Other versions of this item:
- Monica Billio & Ludovic Calès & Dominique Guegan, 2010. "A Cross-Sectional Performance Measure for Portfolio Management," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00523466, HAL.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-30 (All new papers)
- NEP-CSE-2010-10-30 (Economics of Strategic Management)
- NEP-RMG-2010-10-30 (Risk Management)
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