Different risk-adjusted fund performance measures: a comparison
Traditional risk-adjusted performance measures, such as the Sharpe ratio, the Treynor index or Jensen's alpha, based on the mean-variance framework, are widely used to rank mutual funds. However, performance measures that consider risk by taking into account only losses, such as Value-at-Risk (VaR), would be more appropriate. Standard VaR assumes that returns are normally distributed, though they usually present skewness and kurtosis. In this paper we compare these different measures of risk: traditional ones vs. ones that take into account fat tails and asymmetry, such as those based on the Cornish-Fisher expansion and on the extreme value theory. Moreover, we construct a performance index similar to the Sharpe ratio using these VaR-based risk measures. We then use these measures to compare the rating of a set of mutual funds, assessing the different measures' usefulness under the Basel II risk management framework.
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- Enrique Sentana, 2001.
"Mean-variance portfolio allocation with a value at risk constraint,"
LSE Research Online Documents on Economics
25058, London School of Economics and Political Science, LSE Library.
- Sentana, Enrique, 2001. "Mean Variance Portfolio Allocation with a Value at Risk Constraint," CEPR Discussion Papers 2997, C.E.P.R. Discussion Papers.
- Sentana, E., 2001. "Mean-Variance Portfolio Allocation with a Value at Risk Constraint," Papers 0105, Centro de Estudios Monetarios Y Financieros-.
- Enrique Sentana & Enrique Sentana, 2001. "Mean-Variance Portfolio allocation with a Value at Risk Constraint," FMG Discussion Papers dp380, Financial Markets Group.
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