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Selecting a risk-adjusted shareholder performance measure

Author

Listed:
  • Christian S Pedersen

    (Mercer Oliver Wyman)

  • Ted Rudholm-Alfvin

Abstract

The emergence of ‘alternative’ investment opportunities, the current bear market and the Wall Street analysts' conflict of interest debacle have put pressure on current investment performance measurement methodologies. This paper presents a survey of classic and modern performance measures and assesses them against objective criteria. Depending upon the market, industry or group of assets studied and the preferences of investors, different measures gain favour, and key questions to address when selecting an appropriate performance measure are proposed. The arguments are demonstrated empirically for the global financial services sector, for which strong evidence in support of using Sharpe ratio-based measures is documented. As a comparison, the paper also looks at firms listed on the UK Alternative Investment Market (AIM), for which a divergence of rankings based on alternative measures is illustrated. General implications for risk management and asset allocations across different asset classes are discussed.

Suggested Citation

  • Christian S Pedersen & Ted Rudholm-Alfvin, 2003. "Selecting a risk-adjusted shareholder performance measure," Journal of Asset Management, Palgrave Macmillan, vol. 4(3), pages 152-172, September.
    • Handle: RePEc:pal:assmgt:v:4:y:2003:i:3:d:10.1057_palgrave.jam.2240101
    DOI: 10.1057/palgrave.jam.2240101
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    Citations

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    Cited by:

    1. Auer, Benjamin R., 2015. "Does the choice of performance measure influence the evaluation of commodity investments?," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 142-150.
    2. Schuhmacher, Frank & Eling, Martin, 2011. "Sufficient conditions for expected utility to imply drawdown-based performance rankings," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2311-2318, September.
    3. Caporin, Massimiliano & Lisi, Francesco, 2011. "Comparing and selecting performance measures using rank correlations," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 5, pages 1-34.
    4. Claudio Giannotti & Gianluca Mattarocci, 2013. "The Role of Risk Measures Choices in Ranking Real Estate Funds: Evidence from the Italian Market," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Alessandro Carretta & Gianluca Mattarocci (ed.), Asset Pricing, Real Estate and Public Finance over the Crisis, chapter 10, pages 165-189, Palgrave Macmillan.
    5. Zhang, Hanxiong & Auer, Benjamin R. & Vortelinos, Dimitrios I., 2018. "Performance ranking (dis)similarities in commodity markets," Global Finance Journal, Elsevier, vol. 35(C), pages 115-137.
    6. Eling, Martin & Schuhmacher, Frank, 2007. "Does the choice of performance measure influence the evaluation of hedge funds?," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2632-2647, September.
    7. 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, January.

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