Maximum Certain Equivalent Excess Returns and Equivalent Preference Criteria Part I - Theory
AbstractGeneralizations of traditional preference criteria such as the Sharpe ratio, the information ratio and the Jensen alpha are obtained by maximizing a certain equivalent excess return (CER) under relevant investment conditions. They are increasing functions of CERs and therefore equivalent criteria. They are consistent with utility theory and are applicable to any investment choice. That is not the case for many other popular preference criteria (e.g., Omega index, Sortino ratio, expected shortfall and so-called 'coherent' preference criteria). Most are incompatible with expected utility maximization and therefore best avoided.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2008-05.
Length: 31 pages
Date of creation: Aug 2007
Date of revision: Dec 2008
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Certain equivalent excess return; risk adjusted performance measures; risk aversion; power utility functions; coherent risk measures; spectral indices; Sharpe ratio; generalized Sharpe ratio; information ratio; Treynor ratio; Jensen alpha; skewness; kurtosis; downside risk measures; expected shortfall; Sortino ratio; Omega ratio;
Find related papers by JEL classification:
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- 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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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