IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

The Sampling Relationship Between Sharpe's Performance Measure and its Risk Proxy: Sample Size, Investment Horizon and Market Conditions

Listed author(s):
  • Son-Nan Chen

    (Virginia Polytechnic Institute and State University)

  • Cheng F. Lee

    (University of Illinois at Urbana-Champaign)

Sharpe's, Treynor's and Jensen's measures have been extensively used for the performance evaluation of mutual funds or portfolios. These three widely used performance measures have been found to be highly correlated with their corresponding risk measures by a number of empirical studies. This paper focuses the investigation on the possible sources of the bias associated with the empirical relationship between the estimated Sharpe's measure and its estimated risk measure. In general, the sample size, the investment horizon and the market conditions are three important factors in determining the strong relationship between the ex-post Sharpe's measure and its estimated risk surrogate. The interesting findings of this study are as follows: (1) the estimated Sharpe's measure is uncorrelated with the estimated risk measure either when the risk free rate of interest equals the expected return on the market portfolio over the sample period or when the sample size is infinite, (2) the estimated Sharpe's measure is positively (or negatively) correlated with the estimated risk measure if the risk-free rate of interest is greater than (or less than) the expected return on the market portfolio, (3) an observation horizon shorter than the true investment horizon can reduce the dependence of the estimated Sharpe's measure on its estimated risk measure, and (4) an observation horizon longer than the true investment horizon will magnify the dependence. The results have indicated that, in conducting empirical research, a shorter observation horizon and a large sample size should be used to reduce the bias associated with the estimated Sharpe's measure.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Article provided by INFORMS in its journal Management Science.

Volume (Year): 27 (1981)
Issue (Month): 6 (June)
Pages: 607-618

in new window

Handle: RePEc:inm:ormnsc:v:27:y:1981:i:6:p:607-618
Contact details of provider: Postal:
7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

Phone: +1-443-757-3500
Fax: 443-757-3515
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:27:y:1981:i:6:p:607-618. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.