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On the foundation of performance measures under asymmetric returns

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  • Christian Pedersen
  • Stephen Satchell

Abstract

We examine two performance measures advocated for asymmetric return distributions: the Sortino ratio—originally introduced by Sortino and Price (Sortino F and Price L 1994 J. Investing 59-65)—and a measure based on power utility introduced in Leland (Leland H 1999 Financial Analysts J. 27-36). In particular, we investigate the role of the maximum principle in this context, and assess the conditions under which the measures satisfy it. Our results add further motivation for the use of a modified Sortino ratio, by placing it on a sound theoretical foundation. In this light, we discuss its relative merits compared with alternative approaches.

Suggested Citation

  • Christian Pedersen & Stephen Satchell, 2002. "On the foundation of performance measures under asymmetric returns," Quantitative Finance, Taylor & Francis Journals, vol. 2(3), pages 217-223.
    • Handle: RePEc:taf:quantf:v:2:y:2002:i:3:p:217-223
    DOI: 10.1088/1469-7688/2/3/304
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    References listed on IDEAS

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    1. Pedersen, C. S., 1998. "Empirical Tests for Differences in Equilibrium Risk Measures with Application to Downside Risk in Small and Large UK Companies," Accounting and Finance Discussion Papers 98-af41, Faculty of Economics, University of Cambridge.
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