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Portfolio Performance and the Investment Horizon

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  • Haim Levy

    (The Hebrew University of Jerusalem)

Abstract

Following the equilibrium model which has been developed by Sharpe, Lintner and Treynor, several authors have developed one-parameter indexes as measures of performance. In this paper, it is shown that as long as the "true" horizon does not coincide with the horizon assumed in the empirical research, the one-parameter indexes contain a systematic bias, even when one assumes a perfect market. In conducting empirical research or in evaluating the performance of the management of a portfolio, more attention should be devoted to the selection of the investment horizon, since the magnitude as well as the direction of the systematic bias is a function of this factor.

Suggested Citation

  • Haim Levy, 1972. "Portfolio Performance and the Investment Horizon," Management Science, INFORMS, vol. 18(12), pages 645-653, August.
    • Handle: RePEc:inm:ormnsc:v:18:y:1972:i:12:p:b645-b653
    DOI: 10.1287/mnsc.18.12.B645
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    Cited by:

    1. George G. Kaufman, 1980. "Duration, Planning Period, And Tests Of The Capital Asset Pricing Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 3(1), pages 1-9, March.
    2. George Tzagkarakis & Frantz Maurer, 2020. "An energy-based measure for long-run horizon risk quantification," Annals of Operations Research, Springer, vol. 289(2), pages 363-390, June.
    3. Francine Roure & Alain Butery, 1982. "Droite de marché des titres et performances des sociétés holdings pures françaises," Revue Économique, Programme National Persée, vol. 33(3), pages 497-540.
    4. Kathleen Walsh, 2015. "The investment horizon and asset pricing models," Australian Journal of Management, Australian School of Business, vol. 40(2), pages 277-294, May.
    5. George Tzagkarakis & Frantz Maurer, 2023. "Horizon-Adaptive Extreme Risk Quantification for Cryptocurrency Assets," Computational Economics, Springer;Society for Computational Economics, vol. 62(3), pages 1251-1286, October.
    6. Ken Johnston & John Hatem & Elton Scott, 2013. "A note on the evaluation of long-run investment decisions using the sharpe ratio," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(1), pages 150-157, January.
    7. Darolles, Serge & Gourieroux, Christian, 2010. "Conditionally fitted Sharpe performance with an application to hedge fund rating," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 578-593, March.
    8. Prakash, Arun J. & Chang, Chun-Hao & Pactwa, Therese E., 2003. "Selecting a portfolio with skewness: Recent evidence from US, European, and Latin American equity markets," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1375-1390, July.
    9. Jozef Barunik & Josef Kurka, 2021. "Risks of heterogeneously persistent higher moments," Papers 2104.04264, arXiv.org, revised Mar 2024.
    10. Levy, Haim & Schwarz, Gideon, 1997. "Correlation and the time interval over which the variables are measured," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 341-350.
    11. R Jea & C-T Su & J-L Lin, 2005. "Time aggregation effect on the correlation coefficient: added-systematically sampled framework," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 56(11), pages 1303-1309, November.
    12. Chakrabarty, Anindya & De, Anupam & Gunasekaran, Angappa & Dubey, Rameshwar, 2015. "Investment horizon heterogeneity and wavelet: Overview and further research directions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 45-61.
    13. Haim Levy & Ilan Guttman & Isabel Tkatch, 2001. "Regression, Correlation, and the Time Interval: Additive-Multiplicative Framework," Management Science, INFORMS, vol. 47(8), pages 1150-1159, August.
    14. Jea, Rong & Lin, Jin-Lung & Su, Chao-Ton, 2005. "Correlation and the time interval in multiple regression models," European Journal of Operational Research, Elsevier, vol. 162(2), pages 433-441, April.
    15. Lin, Chang-Chun & Liu, Yi-Ting, 2008. "Genetic algorithms for portfolio selection problems with minimum transaction lots," European Journal of Operational Research, Elsevier, vol. 185(1), pages 393-404, February.
    16. Jean-Baptiste Hasse & Christelle Lecourt & Souhila Siagh, 2023. "Institutional Stock-Bond Portfolios Rebalancing and Financial Stability," AMSE Working Papers 2322, Aix-Marseille School of Economics, France.
    17. Basso, Antonella & Funari, Stefania, 2001. "A data envelopment analysis approach to measure the mutual fund performance," European Journal of Operational Research, Elsevier, vol. 135(3), pages 477-492, December.
    18. Chun-Hao Chang & Brice Dupoyet & Arun Prakash, 2008. "Effect of intervalling and skewness on portfolio selection in developed and developing markets," Applied Financial Economics, Taylor & Francis Journals, vol. 18(21), pages 1697-1707.
    19. Chaudhury, M. M. & Lee, C. F., 1997. "Functional form of stock return model: Some international evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(1), pages 151-183.
    20. Haim Levy, 1996. "Investment diversification and investment specialization and the assumed holding period," Applied Mathematical Finance, Taylor & Francis Journals, vol. 3(2), pages 117-134.
    21. Ziemowit Bednarek & Pratish Patel & Cyrus A. Ramezani, 2016. "Time aggregation of the Sharpe ratio," Journal of Asset Management, Palgrave Macmillan, vol. 17(7), pages 540-555, December.
    22. Francis In & Sangbae Kim & Vijaya Marisetty & Robert Faff, 2008. "Analysing the performance of managed funds using the wavelet multiscaling method," Review of Quantitative Finance and Accounting, Springer, vol. 31(1), pages 55-70, July.
    23. Francis In & Sangbae Kim, 2012. "An Introduction to Wavelet Theory in Finance:A Wavelet Multiscale Approach," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8431, December.
    24. Anindya Chakrabarty & Anupam De & Gautam Bandyopadhyay, 2016. "Horizon heterogeneity, institutional constraint and managerial myopia: a multi-frequency perspective on ELSS," International Journal of Business Excellence, Inderscience Enterprises Ltd, vol. 9(1), pages 18-47.
    25. Chunhachinda, Pornchai & Dandapani, Krishnan & Hamid, Shahid & Prakash, Arun J., 1997. "Portfolio selection and skewness: Evidence from international stock markets," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 143-167, February.

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