Sharpe Ratio Research Papers - Academia.edu (original) (raw)

Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manaager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds may be explained by the nature of this fee arrangement. Fund of funds providers pass on individual hedge fund incentive fees in the form of after-fee returns, although they are in a better position to hedge these fees than are their investors. We examine a new fee arrangement emerging in the industry that may provide better incentives at a lower cost to investors in these funds.

- by
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- Hedge Funds, Developing Country, Sharpe Ratio

The study measures the performance of mutual fund (MF) schemes in India with special reference to sector-specific schemes. For the purpose, 21 open-ended equity schemes are considered and analysed by employing Sharpe ratio, Treynor ratio, Jensen alpha, M-squared measure, R-squared measure, and Information ratio. Among the measures selected, the Treynor ratio, Sharpe ratio, Jensen alpha, and M-squared measure are applied as absolute measures and these measures do not compare the returns of the schemes with the returns of their benchmarks. Correlation analysis has also been applied to the ranks assigned by the measures. The study found that majority of the schemes are efficiently and consistently providing more returns than their respective benchmarks. Also, the study found the ranks assigned by absolute measures to be highly associated with each other and the paired correlation between absolute measures and the information ratio is found to be insignificant. The article will help the investors in selecting the consistent sectoral MF schemes operating in India. The originality of the article lies in the fact that only a handful of studies have measured the performance of sectoral MF schemes in India. In addition, majority of the studies use traditional ratios to measure the performance of MF schemes. Thus, the present article is a significant addition to the existing literature.

- by Publishing India Group
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- Finance, Accounting, Mutual Funds, Sharpe Ratio

The purpose of this paper is to discover a semi-optimal set of trading rules and to investigate its effectiveness as applied to Egyptian Stocks. The aim is to mix different categories of technical trading rules and let an automatic evolution process decide which rules are to be used for particular time series. This difficult task can be achieved by using Genetic Algorithms (GA's), they permit the creation of artificial experts taking their decisions from an optimal subset of the a given set of trading rules. The GA's based on the survival of the fittest, do not guarantee a global optimum but they are known to constitute an effective approach in optimizing non-linear functions. Selected Liquid Stocks are tested and GA Trading rules were compared with other Conventional and well known Technical Analysis Rules. The Proposed GA system showed clear better average profit and in the same High Sharpe ratio, which indicates not only good profitability but also better risk-reward trade-off.

- by Hazem Abdelazim
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- Time Series, Genetic Algorithms, Genetic Algorithm, Economic Forecasting

Use of artificial intelligence systems in forecasting financial markets requires a reliable and simple model that would ensure profitable growth. The model presented in the paper combines Evolino recurrent neural networks with orthogonal data inputs and the Delphi expert evaluation method for its investment portfolio decision making process. A statistical study demonstrates the reliability of the model and describes its accuracy. Capabilities of the model are demonstrated using a trading simulation.

Alfred Cowles' test of the Dow Theory apparently provides strong evidence against the ability of Wall Street's most famous chartist to forecast the stock market. Cowles 1934! analyzes editorials published by the chief exponent of the Dow Theory, William Peter Hamilton. We review Cowles' evidence and find that it supports the contrary conclusion. Hamilton's timing strategies actually yield high Sharpe ratios and positive alphas for the period 1902 to 1929. Neural net modeling to replicate Hamilton's market calls provides interesting insight into the Dow Theory and allows us to examine the properties of the theory itself out of sample.

- by Stephen Brown
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- Finance, Stock Market, Sharpe Ratio, Risk Adjustment

This paper makes an extensive simulation comparison of popular dynamic strategies of asset allocation. For each strategy, alternative measures have been calculated for risk, return and risk-adjusted performance (Sharpe ratio, Sortino ratio, return at risk). Moreover, the strategies are compared in di erent market situations (bull, bear, no-trend markets) and with di erent market volatility, taking into account transaction costs and discrete rebalancing of portfolios. The simulations show a dominant role of constant proportion strategies in bear and no-trend markets and a preference for benchmarking strategies in bull markets. These results are independent of the volatility level and the risk-adjusted measure adopted.

- by riccardo cesari
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- Monte Carlo Simulation, Economic Theory, Monte Carlo, Asset Allocation

This paper presents an empirical comparison of the out of sample hedging performance from naïve and minimum variance hedge ratios for the four largest US index exchange traded funds (ETFs). Efficient hedging is important to offset long and short positions on market maker's accounts, particularly imbalances in net creation or redemption demands around the time of dividend payments. Our evaluation of out of sample hedging performance includes aversion to negative skewness and excess kurtosis. The results should be of interest to hedge funds employing tax arbitrage or leveraged long-short equity strategies as well as to ETF market makers.

- by Carol Alexander
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- Applied Mathematics, Hedge Funds, Sharpe Ratio, Minimum variance

Purpose of this study is to apply to modify Sharpe Ratio to calculate Star Ranking of Equity-based mutual funds registered in
Mutual Fund Association of Pakistan, further, the idea was to recalibrate locally developed models being used in Pakistan by
autonomous professional bodies who professionally assigns star ranking of mutual funds, equity market exhibited negative
returns from July 2017 onwards this research which brought the problem to assign star ranking due to model structure,
model relies on risk-adjusted return (Sharpe Ratio), therefore Sharpe Ratio has a limitation in negative excess return. Two
developed models were simultaneously compared to witness the predictive power of these models, (1) modified Sharpe and
(2) VIS Credit Rating Company (Explaining the Stars) Model. Data was collected from March 2013 to March 2018 quarterly
and the exercise was done quarterly. Findings revealed a magnificent piece of work, (1) there is no difference between model
1 and model 2 by both way results exhibited same mutual fund star rankings, (2) both methods have a different way of
calculating final score with same results, and (3) modified Sharpe ratio is quite well when excess return is negative but when
there is a mix of negative and positive better to use VIS model as well as in positive excess returns. A research paper could
not calibrate other models developed by rating companies (Pakistan Credit Rating Company) which is a future research gap.

- by Muhammad Rehan
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- Behavioral Finance, Corporate Finance, Stock Return, Sharpe Ratio
- by Olivier Gergaud
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- Portfolio Management, Hedge Funds, Sharpe Ratio, Investment Strategy
- by Alok Kumar
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- Finance, Stock Market, Sharpe Ratio, Risk Adjustment

The present paper attempts to empirically evaluate the performances of ‘actively managed’ and ‘passive (index)’ mutual funds in India over period April 2006 – March 2019 with following two important objectives: (1) have the actively managed mutual funds been able to outperform the market; and (2) have the actively managed mutual funds in India been able to generate statistically superior returns as compared to passive (index) funds. For achieving the stated objectives, performance of 25 actively managed large cap funds and 22 large cap passive (index) funds has been analyzed. Daily Net Asset Values (NAVs) of regular plan - growth options of all the funds has been considered. Further, various risk-return measures such as fund returns, Sharpe ratio, Treynor ratio, and Jensen alpha of funds have been analysed. ‘Two-sample tTest’ has been employed to test for difference in performances of the two groups. The findings indicate that during the period of analysis, actively managed funds were not able to outperform the market. Also, there was no significant difference in the performances of actively managed funds and passive (index) funds on account of fund returns, Sharpe ratio, and Treynor ratio during the chosen time period, barring Jensen alpha measure for which the actively managed funds were able to perform better as compared to passive (index) fund.

- by IAEME Publication
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- Sharpe Ratio, Treynor ratio, Jensen alpha

Some studies find the dollar-cost averaging investment strategy to be sub-optimal using a traditional Sharpe ratio performance ranking metric. Using both the Sortino ratio and the Upside Potential ratio, we empirically test four investment strategies for alternative asset investments. We find the relative ranking of dollar-cost averaging remains inferior to alternative investment strategies. (JEL G1, G11, N2)

- by Donald Lien
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- Applied Economics, Sharpe Ratio, Economics Finance, Investment Strategies

Previous research concludes that options are mispriced based on the high average returns, CAPM alphas, and Sharpe ratios of various put selling strategies. One criticism of these conclusions is that these benchmarks are ill suited to handle the extreme statistical nature of option returns generated by nonlinear payoffs. We propose an alternative way to evaluate the statistical significance of option returns by comparing historical statistics to those generated by option pricing models. The most puzzling finding in the existing literature, the large returns to writing out-of-the-money puts, is not inconsistent (i.e., is statistically insignificant) relative to the Black-Scholes model or the Heston stochastic volatility model due to the extreme sampling uncertainty associated with put returns. This sampling problem can largely be alleviated by analyzing market-neutral portfolios such as straddles or deltahedged returns. The returns on these portfolios can be explained by jump risk premiums and estimation risk. (JEL C12, G13) It is a common perception that index options are mispriced, in the sense that certain option returns are excessive relative to their risks. 1 The primary evidence supporting mispricing is the large magnitude of historical S&P 500 put option We thank

- by Michael Johanes
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- Economic Theory, Applied Economics, Sharpe Ratio, Financial Studies

As the assumption of normality in return distributions is relaxed, classic Sharpe ratio and its descendants become questionable tools for constructing optimal portfolios. In order to overcome the problem, asymmetrical parameter-dependent performance ratios have been recently proposed in the literature. The aim of this note is to develop an integrated decision aid system for asset allocation based on a toolkit of eleven performance ratios. A multi-period portfolio optimization up covering a fixed horizon is set up: at first, bootstrapping of asset return distributions is assessed to recover all ratios calculations; at second, optimal rebalanced-weights are achieved; at third, optimal final wealth is simulated for each ratios. Eventually, we make a robustness test on best performance ratios. Empirical simulations confirm the weakness in forecasting of Sharpe ratio, whereas asymmetrical parameter-dependent ratios, such as the Generalized Rachev, Sortino-Satchell and Farinelli-Tibiletti ratios show satisfactorily robustness.

- by Manuel Ferreira
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- Applied Mathematics, Banking, Asset Allocation, Portfolio Optimization

Country indices as represented by iShares exhibit non-normal return distributions with both skewness and kurtosis. and Memmel (2003) provide procedures for determining the statistical significance of stochastic dominance measures and the Sharpe Ratio, respectively. This study uses these refinements to compare the performance of 18 country market indices. The iShares are indistinguishable when using the Sharpe Ratio as no significant differences are found. In contrast, stochastic dominance procedures identify dominant iShares. Although the results vary over time, stochastic dominance appears to be both more robust and discriminating than the CAPM in the ranking of the iShares.

- by j kenton zumwalt
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- Stochastic dominance, Sharpe Ratio, Statistical Significance, Indexation

ABSTRACT Technical trading rules can be generated from historical data for decision making in stock markets. Genetic programming (GP) as an artificial intelligence technique is a valuable method to automatically generate such technical trading rules. In this paper, GP has been applied for generating risk-adjusted trading rules on individual stocks. Among many risk measures in the literature, conditional Sharpe ratio has been selected for this study because it uses conditional value at risk (CVaR) as an optimal coherent risk measure. In our proposed GP model, binary trading rules have been also extended to more realistic rules which are called trinary rules using three signals of buy, sell and no trade. Additionally we have included transaction costs, dividend and splits in our GP model for calculating more accurate returns in the generated rules. Our proposed model has been applied for 10 Iranian companies listed in Tehran Stock Exchange (TSE). The numerical results showed that our extended GP model could generate profitable trading rules in comparison with buy and hold strategy especially in the case of risk adjusted basis.

- by Akbar Esfahanipour
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- Decision Making, Stock Market, Mathematical Sciences, Sharpe Ratio

Aim of the study is to determine the better performance measure during the financial crisis. In order to do so, we selected the pandemic period during the Jan to Jul 2020 and analyzed the different performance ratios for our sample of 1416 Indian equity funds. Then we ranked them based on different performance indicators to show the gross difference while opting for different performance ratios. Finally we observe that adjusted Sharpe ratio is the best performance measure that can be used in the volatile markets.

- by IAEME Publication
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- Sharpe Ratio, ASR, Treynor, Sortino

As the assumption of normality in return distributions is relaxed, classic Sharpe ratio and its descendants become questionable tools for costructing optimal portfolios. In order to overcome the problem, asymmetrical parameter-dependent performance ratios have been recently proposed in the literature. The aim of this note is to develop an integrated decision aid system for asset allocation based on a toolkit of eleven performance ratios. A multi-period portfolio optimization up covering a ﬁxed horizon is set up: at ﬁrst, bootstrapping of asset return distributions is assessed to recover all ratios calculations; at second, optimal rebalanced-weights are achieved; at third, optimal ﬁnal wealth is simulated for each ratios.
Eventually, we make a robustness test on best performance ratios. Empirical simulations conﬁrm the weakness in forecasting of Sharpe ratio, whereas asymmetrical parameter-dependent ratios, such as the Generalized Rachev, Sortino-Satchell and Farinelli-Tibiletti ratios show satisfactorily robustness.

- by Damiano Rossello and +1
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- Applied Mathematics, Banking, Asset Allocation, Portfolio Optimization

Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated. While it could be important for long horizon investors, time diversification has been mostly investigated in asset menus without real estate and focusing on in-sample experiments. This paper evaluates ex post, out-of-sample gains from diversification when E-REITs belong to the investment opportunity set. We find that diversification into REITs increases both the Sharpe ratio and the certainty equivalent of wealth for all investment horizons and for both Classical and Bayesian (who account for parameter uncertainty) investors. The increases in Sharpe ratios are often statistically significant. However, the out-of-sample average Sharpe ratio and realized expected utility of long-horizon portfolios are frequently lower than that of a one-period portfolio, which casts doubts on the value of time diversification. JEL Classification Codes: G11, L85.

Previous studies have documented that Data Envelopment Analysis (DEA) could be a good tool to evaluate fund performance, especially the performance of hedge funds as it can incorporate multiple risk-return attributes characterizing hedge fund's non normal return distribution in an unique performance score. The main purpose of this paper is to generalize this framework and to extend the use of DEA to the context of hedge fund selection when investors must face multi-dimensional constraints, each one associated to a relative importance level. Unlike previous studies which used DEA in an empirical framework, this research puts emphasis on methodological issues. I showed that DEA can be a good tailor-made decision-making tool to assist investors in selecting funds that correspond the most to their financial, risk-aversion, diversification and investment horizon constraints.

This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. "Technicians" view their craft, the study of price patterns, as exploiting traders' psychological regularities. The literature on technical analysis has established that simple technical trading rules on dollar exchange rates provided 15 years of positive, risk-adjusted returns during the 1970s and 80s before those returns were extinguished. More recently, more complex and less studied rules have produced more modest returns for a similar length of time. Conventional explanations that rely on risk adjustment and/or central bank intervention do not plausibly justify the observed excess returns from following simple technical trading rules. Psychological biases, however, could contribute to the profitability of these rules. We view the observed pattern of excess returns to technical trading rules as being consistent with an adaptive markets view of the world.

- by Julian Andrada-Felix
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- Finance, Economics, Econometrics, Data Mining

We introduce a practical alternative to Gaussian risk factor distributions based on Svetlozar Rachev's work on Stable Paretian Models in Finance (see and called the Stable Distribution Framework. In contrast to normal distributions, stable distributions capture the fat tails and the asymmetries of real-world risk factor distributions. In addition, we make use of copulas, a generalization of overly restrictive linear correlation models, to account for the dependencies between risk factors during extreme events, and multivariate ARCH-type processes with stable innovations to account for joint volatility clustering. We demonstrate that the application of these techniques results in more accurate modeling of extreme risk event probabilities, and consequently delivers more accurate risk measures for both trading and risk management. Using these superior models, VaR becomes a much more accurate measure of downside risk. More importantly Stable Expected Tail Loss (SETL) can be accurately calculated and used as a more informative risk measure for both market and credit portfolios. Along with being a superior risk measure, SETL enables an elegant approach to portfolio optimization via convex optimization that can be solved using standard scalable linear programming software. We show that SETL portfolio optimization yields superior risk adjusted returns relative to Markowitz portfolios. Finally, we introduce an alternative investment performance measurement tools: the Stable Tail Adjusted Return Ratio (STARR), which is a generalization of the Sharpe ratio in the Stable Distribution Framework.

- by Stoyan Stoyanov
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- Convex Optimization, Risk Management, Risk assessment, Portfolio Optimization

Risk management is crucial for optimal portfolio management. One of the fastest growing areas in empirical finance is the expansion of financial derivatives. The purpose of this special issue on "Risk Management and Financial Derivatives" is to highlight some areas in which novel econometric, financial econometric and empirical finance methods have contributed significantly to the analysis of risk management, with an emphasis on financial derivatives, specifically conditional correlations and volatility spillovers between crude oil and stock index returns, pricing exotic options using the Wang transform, the rise and fall of S&P500 variance futures, predicting volatility using Markov switching multifractal model: evidence from S&P100 index and equity options, the performance of commodity trading advisors: a mean-variance-ratio test approach, forecasting volatility via stock return, range, trading volume and spillover effects: the case of Brazil, estimating and simulating Weibull models of risk or price durations: an application to ACD models, valuation of double trigger catastrophe options with counterparty risk, day of the week effect on the VIX -a parsimonious representation, equity and CDS sector indices: dynamic models and risk hedging, the probability of default in collateralized credit operations, risk premia in multi-national enterprises, solving replication problems in a complete market by orthogonal series expansion, downside risk management and VaR-based optimal portfolios for precious metals, oil and stocks, and implied Sharpe ratios of portfolios with options: application to Nikkei futures and listed options.

- by Michael McAleer
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- Economics, Financial Econometrics, Risk Management, Volatility

We develop and analyse investment strategies relying on hidden Markov model approaches. In particular, we use filtering techniques to aid an investor in his decision to allocate all of his investment fund to either growth or value stocks at a given time. As this allows the investor to switch between growth and value stocks, we call this first strategy a switching investment strategy. This switching strategy is compared with the strategies of purely investing in growth or value stocks by tracking the quarterly terminal wealth of a hypothetical portfolio for each strategy. Using the data sets on Russell 3000 growth index and Russell 3000 value index compiled by Russell Investment Services for the period 1995-2008, we find that the overall risk-adjusted performance of the switching strategy is better than that of solely investing in either one of the indices. We also consider a second strategy referred to as a mixed investment strategy which enables the investor to allocate an optimal proportion of his investment between growth and value stocks given a level of risk aversion. Numerical demonstrations are provided using the same data sets on Russell 3000 growth and value indices. The switching investment strategy yields the best or second best Sharpe ratio as compared with those obtained from the pure index strategies and mixed strategy in 14 intervals. The performance of the mixed investment strategy under the HMM setting is also compared with that of the classical mean-variance approach. To make the comparison valid, we choose the same level of risk aversion for each set-up. Our findings show that the mixed investment strategy within the HMM framework gives higher Sharpe ratios in 5 intervals of the time series than that given by the standard mean-variance approach. The calculated weights through time from the strategy incorporating the HMM set-up are more stable. A simulation analysis further shows a higher performance stability of the HMM strategies compared with the pure strategies and the mean-variance strategy.

- by Christina Erlwein and +2
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- Applied Mathematics, Statistics, Investment, Sharpe Ratio

We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1/N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1/N rule in terms of Sharpe ratio, certainty-equivalent return, or turnover, which indicates that, out of sample, the gain from optimal diversification is more than offset by estimation error. Based on parameters calibrated to the US equity market, our analytical results and simulations show that the estimation window needed for the sample-based mean-variance strategy and its extensions to outperform the 1/N benchmark is around 3000 months for a portfolio with 25 assets and about 6000 months for a portfolio with 50 assets. This suggests that there are still many "miles to go" before the gains promised by optimal portfolio choice can actually be realized out of sample. (JEL G11) In about the fourth century, Rabbi Issac bar Aha proposed the following rule for asset allocation: "One should always divide his wealth into three parts: a third in land, a third in merchandise, and a third ready to hand." 1 After a "brief"

- by Raman Uppal
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- Economic Theory, Applied Economics, Sharpe Ratio, Financial Studies

Exchange-traded Funds (ETFs) have been gaining increasing popularity in the investment community, as evidenced by their high growth both in the number of ETFs created and their net assets since 2000. As ETFs are in nature similar to index mutual funds, in this article we examine whether this growing demand for ETFs can be explained through their outperformance as compared with index mutual funds. We consider the population of all ETFs with inception dates before 2002 and then for each ETF found all the passive index mutual funds that had the same investment style as the selected ETF and had an inception date before 2002. This led to a sample of 230 paired matches for all the styles. Within each investment style we matched every ETF with all the passive index funds in that investment style and compared the performances of the matched pairs in terms of Sharpe Ratios and risk-adjusted buy and hold total returns for the period 2002–2010. We then applied the Wilcoxon signed rank test to ...

During recent years, the Indian financial sector has undergone revolutionary changes and has become broad based with size and resources so as to meet diverse needs of the economy. Mutual funds are becoming attractive avenue for investors because of various benefits attached to them. Due to lack of professional expertise and knowledge about capital market and also pros and cons of investment, the small investors hesitate to invest their hard earned money in corporate securities. Common man may hesitate to invest in corporate securities directly, however, during COVID 19, large number of demat accounts have been opened. Thus, a mutual fund is the suitable investment for common man as it offers an opportunity to invest in diversified, professionally managed avenues for securities at the lowest cost. In this research paper an attempt is made to analyse the performance of the growth oriented direct equity mutual fund schemes on the basis of risk and return analysis especially with reference to COVID 19. The funds' risks and returns have been analysed with time frame of "Pre-COVID19" and "Post-COVID19". The analysis is done through various statistical tools and tests like Average Return, Standard Deviation, Beta, Sharpe Ratio, Jensen Measure, Treynor Ratio, and Coefficient of Determination (R 2) to assess the impact of COVID 19 recovery rate of mutual funds.

- by IJRASET Publication
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- Mutual Funds, Standard Deviation, Sharpe Ratio, Beta Israel

Franchising has attracted the attention of retailing and entrepreneurship scholars in the past three decades, but evidence pertaining to how franchising affects financial performance is mixed and inconclusive. Thus, the question remains as to whether franchising firms exhibit better financial performance than non-franchising firms in the same industry. In order to find an answer to this question, our study compares the riskadjusted financial performance of franchising versus non-franchising restaurant firms over the 1995-2008 interval, using five different performance measures: the Sharpe Ratio, the Treynor Ratio, the Jensen Index, the Sortino Ratio, and the Upside Potential Ratio. For each measure, the results revealed that franchising restaurant firms outperformed their non-franchising counterparts. Thus, we provide very robust evidence that franchising is superior on average in the restaurant industry, which can help explain the increasing popularity of franchising as a business form.

- by Melih Madanoglu
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- Marketing, Finance, Retailing, Sharpe Ratio

This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates.

- by Dagfinn Rime and +1
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- Economics, Microstructure, Foreign Exchange Market, Forecasting

- by Animesh Bhattacharjee
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- Finance, Accounting, Mutual Funds, Financial management

Global equity portfolio managers employ a variety of approaches to currency hedging either hedging all of their currency risk, hedging only a portion of their currency risk, or simply not hedging at all. This paper considers a hypothetical US-based global portfolio invested in Europe, Asia, Latin America, and the US and looks at how various passive hedging strategies would have

Motivated by ample evidence that stock-return correlations are stochastic, we study the economic idea that the risk of correlation changes (affecting diversification benefits and investment opportunities) may be priced. We propose a powerful test by comparing option-implied correlations between stock returns (obtained by combining S&P100 option prices with prices of individual options on all index components) with realized correlations. Our parsimonious model shows that the substantial gap between average implied (46.7%) and realized (28.7%) correlations is direct evidence of a large negative correlation risk premium, since individual variance risk is not priced in our 1996-2003 sample. Empirical implementation of our model also indicates that the entire index variance risk premium can be attributed to the high price of correlation risk. Finally, the model offers a quantitatively accurate risk-based explanation of the empirically observed discrepancy between expected returns on index and on individual options. Index options are expensive, in contrast to individual options, because they hedge correlation risk. Standard models for individual equity returns with priced jump or volatility risk, but without priced correlation risk, fail to explain this discrepancy.

- by Grigory Vilkov
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- Sharpe Ratio, Stochastic Volatility, Cross Section, Option pricing

There are many ways in which investor can measure the performance of portfolio. Dif erent theorists have proposed many dif erent models for this purpose. The Sharpe Ratio given by Sharpe (1964) and its close analogical concept - the Information Ratio, are one of the most common measures of portfolio performance. Active investing requires the portfolio managers to better the stock market’s average returns and take advantage of short-term price fluctuations. The active return of the portfolio should perform as well as the benchmark or, better so, outperform the benchmark. The simplicity of these two ratios leads them to their greatest weakness. Both the ratios are useful for evaluating the portfolio but only in limited situation. They are not applicable in asymmetric situations. In this paper, an effort has been made to analyse the correlation between the two to give more concise relationship between these tools and their measuring of performance.

- by IAEME Publication
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- Risk, Standard Deviation, Sharpe Ratio, Risk-Adjusted Performance Measures

In the past 20 years, momentum or trend following strategies have become an established part of the investor toolbox. We introduce a new way of analyzing momentum strategies by looking at the information ratio (IR, average return divided by standard deviation). We calculate the theoretical IR of a momentum strategy, and show that if momentum is mainly due to the positive autocorrelation in returns, IR as a function of the portfolio formation period (look-back) is very different from momentum due to the drift (average return). The IR shows that for look-back periods of a few months, the investor is more likely to tap into autocorrelation. However, for look-back periods closer to 1 year, the investor is more likely to tap into the drift. We compare the historical data to the theoretical IR by constructing stationary periods. The empirical study finds that there are periods/regimes where the autocorrelation is more important than the drift in explaining the IR (particularly pre-1975) and others where the drift is more important (mostly after 1975). We conclude our study by applying our momentum strategy to 100 plus years of the Dow-Jones Industrial Average. We report damped oscillations on the IR for look-back periods of several years and model such oscilations as a reversal to the mean growth rate.

- by Christian Silva
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- Quantitative, Trading Strategies, Sharpe Ratio, Momentum

A simple valuation model that allows for time variation in investment opportunities is developed and estimated. The model assumes that the investment opportunity set is completely described by two state variables, the real interest rate and the maximum Sharpe ratio, which follow correlated Ornstein-Uhlenbeck processes. The model parameters and time series of the state variables are estimated using data on US Treasury bond yields and expected in-flation for the period January 1952 to December 2000, and, as predicted, the estimated maximum Sharpe ratio is shown to be related to the equity premium. In cross-sectional asset pricing tests using the 25 Fama-French size and book-to-market portfolios, both state variables are found to have significant risk premia, which is consistent with the ICAPM of . In contrast to the CAPM and the Fama-French 3-factor model, the simple ICAPM is not rejected by cross-sectional tests using the 25 Fama-French size and B/M sorted portfolios. Returns on the 30 industrial portfolios do not discriminate clearly between the three models. When both sets of portfolios are included as test assets all three models are rejected, but the estimated risk premia for both ICAPM state variables are significant while those associated with the Fama-French arbitrage portfolios are insignificant.

- by Ashley Wang
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- Finance, Time Series, Sharpe Ratio, Equity Premium

: The study of the effectiveness of using cryptocurrencies as an investment resource was conducted on the
basis of testing the hypothesis that the introduction of leading cryptocurrencies that are components of the CRIX index
into the investment portfolio improves its quality (efficiency). Cryptocurrency investment opportunities are explored on
the basis of statistics for July 2016-June 2019. An average annual return on investment (ROI), which is adjusted for
passive income on an investment asset (PI), is used to evaluate investment performance. In this study, cryptocurrencies
are compared with the following alternative investment areas: Forex market, equities (companies with the highest
weights in Nasdaq 100, Euro STOXX 50), commodities, government bonds, real estate. The criteria were determined by
the increase in the Sharpe ratio of the investment portfolio and its average annual return. Optimization of investment
portfolios without cryptocurrencies and with them was performed on the basis of the Markowitz model. The result shows
the confirmation of the hypothesis: the introduction of 3 cryptocurrencies – Bitcoin, Ripple, Litecoin – in the proportions of
2.31%, 1%, 1%, respectively, increased the Sharpe ratio of the investment portfolio by 3.29 points, and the coefficient of
return by 9.42 percentage points while increasing the risk by only 0.51 percentage points. This result indicates that the
quality (increase in efficiency) of the investment portfolio due to the introduction of cryptocurrencies and the ability to
control the investment risk of the portfolio despite the high volatility of cryptocurrencies. This proves the investment
(speculative) function of crypto-assets, which can be the basis for developing a model of accounting for crypto-assets.

- by Lifescience Global Canada
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- Sharpe Ratio, Bitcoin, Markowitz Model

An optimisation through Markowitz, GA and PSO framework is performed for a 30-stock portfolio, and compared to the market index DJIA. The results show that firstly, Markowitz outperforms the market. Secondly, PSO is more efficient for building of optimal risky portfolio as the expected returns matches the market index. On the other-hand, GA under-performs the Dow-Jones Index Average market index. Also, the PSO framework is associated with lower computational time and occupies less memory storage than the GA.

This paper examines whether high dividend stocks portfolio (represented by CNX dividend opportunity index of NSE) outperforms blue chip stocks portfolios and market portfolio in Indian stock market, using absolute rate of return as well as risk adjusted measures viz Sharpe ratio and Treynor ratio, Jensen ratio and the CAPM. we find that high dividend stocks portfolios has outperformed the market portfolio whereas blue chip stocks portfolio underperformed the market portfolio. These results are consistent with the popular "Dogs of Dow Strategy". Moreover, high dividend stocks portfolio is found to have also lower systematic risk as well as total risk ,than the market portfolio whereas blue chip stocks portfolio has higher systematic risk as well as total risk than that of the market portfolio. High dividend stock portfolio has shown lower total risk per unit of average return. Regression results shows that high dividend stocks portfolio has provided statistically significant abnormal return whereas blue chip stocks portfolio has provided abnormal losses. The finding that high dividend stocks portfolios outperform blue chip stocks portfolio despite of having lower risk implies that most of the high dividend stocks are undervalued while blue chip stocks are overvalued in Indian market. Hence there is mispricing contributing towards market inefficiency. The research findings have important implications for small and retail investors seeking for regular income as compare to future capital gains. Such investors can be benefited by investing in the high dividend stocks portfolio.

- by Vanita Tripathi
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- Sharpe Ratio

Katılım bankacılığı; İslami prensiplerine uygun olarak faaliyetlerini gerçekleştiren bir bankacılık modelidir. Katılım bankaları ilkelerine göre düzenlenen katılım endeksleri dünya çapında uzun yıllardır var olmasına rağmen ülkemizde 2011 yılından bugüne hızlı bir büyüme göstermiştir. Son dönemlerde öne çıkan bir diğer endeks kurumsal yönetim endeksidir. Gerek katılım endeksi gerekse kurumsal yönetim endeksi BİST'de ki diğer sektör endekslerinden farklı olarak daha homojen olan endekslerdir. Bu açıdan, bu çalışmada Kurumsal Yönetim Endeksi ve İslami prensiplere uygun hisse senetlerinden oluşan katılım 30 Endeksi ile BİST 50 Endeksi'nin 10 Ocak 2011 ile 22 Aralık 2016 tarihleri arasındaki risk ve getiri karakterleri incelenmiştir. Çalışma dönemi üç artan ve dört azalan piyasa dönemi olmak üzere yedi alt döneme ayrılmıştır.

- by Hasan Hüseyin Yildirim and +2
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- Corporate Governance, Sharpe Ratio, Logistics Performance Index

The Sharpe ratio is widely used as a performance evaluation measure for traditional (i.e., long only) investment funds as well as less-conventional funds such as hedge funds. Based on meanvariance theory, the Sharpe ratio only considers the first two moments of return distributions, so hedge fundscharacterised by asymmetric, highly-skewed returns with non-negligible higher momentsmay be misdiagnosed in terms of performance. The Sharpe ratio is also susceptible to manipulation and estimation error. These drawbacks have demonstrated the need for augmented measures, or, in some cases, replacement fund performance metrics. Over the period January 2000 to December 2011 the monthly returns of 184 international long/short (equity) hedge funds with geographical investment mandates spanning North America, Europe, and Asia were examined. This study compares results obtained using the Sharpe ratio (in which returns are assumed to be serially uncorrelated) with those obtained using a technique which does account for serial return correlation. Standard techniques for annualising Sharpe ratios, based on monthly estimators, do not account for this effect. In addition, this study assesses whether the Omega ratio supplements the Sharpe Ratio in the evaluation of hedge fund risk and thus in the investment decision-making process. The Omega and Sharpe ratios were estimated on a rolling basis to ascertain whether the Omega ratio does indeed provide useful additional information to investors to that provided by the Sharpe ratio alone.

- by Gary van Vuuren and +1
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- Business Economics, Risk Management, Hedge Funds, Sharpe Ratio

- by Ashley Wang
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- Finance, Time Series, Sharpe Ratio, Equity Premium

The main purpose of this paper is to present a theoretically sound portfolio performance measure that takes into account higher moments of the distribution of returns. First, we perform a study of the investor's preferences to higher moments of distribution within expected utility theory and discuss the performance measurement. To illustrate the investor's preferences to higher moments and the computation of a performance measure, we provide an approximation analysis of the optimal capital allocation problem and derive a formula for the Sharpe ratio adjusted for skewness of distribution. This performance measure justifies the notion of the Generalized Sharpe Ratio (GSR) introduced by Hodges (1998) which presumably accounts for all moments of distribution. We present two methods of practical estimation of the GSR: nonparametric and parametric. For the implementation of the parametric method we derive a closed-form solution for the GSR where the higher moments are calibrated to the normal inverse Gaussian distribution. We illustrate how the GSR can mitigate the shortcomings of the Sharpe ratio in resolution of Sharpe ratio paradoxes and reveal the real performance of portfolios with manipulated Sharpe ratios. We also demonstrate the use of this measure in the performance evaluation of hedge funds.

- by Valeriy Zakamulin and +1
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- Finance, Applied Mathematics, Hedge Funds, Performance Evaluation

In this paper, we analyze momentum strategies that are based on reward-risk stock selection criteria in contrast to ordinary momentum strategies based on a cumulative return criterion. Reward-risk stock selection criteria include the standard Sharpe ratio with variance as a risk measure, and alternative reward-risk ratios with the expected shortfall as a risk measure. We investigate momentum strategies using 517 stocks in the S&P 500 universe in the period 1996 to 2003. Although the cumulative return criterion provides the highest average monthly momentum profits of 1.3% compared to the monthly profit of 0.86% for the best alternative criterion, the alternative ratios provide better risk-adjusted returns measured on an independent risk-adjusted performance measure. We also provide evidence on unique distributional properties of extreme momentum portfolios analyzed within the framework of general non-normal stable Paretian distributions. Specifically, for every stock selection criterion, loser portfolios have the lowest tail index and tail index of winner portfolios is lower than that of middle deciles. The lower tail index is associated with a lower mean strategy. The lowest tail index is obtained for the cumulative return strategy. Given our data-set, these findings indicate that the cumulative return strategy obtains higher profits with the acceptance of higher tail risk, while strategies based on reward-risk criteria obtain better risk-adjusted performance with the acceptance of the lower tail risk.

- by Stoyan Stoyanov
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- Applied Mathematics, Sharpe Ratio, Profitability, Selection Criteria
- by Francois van Dyk
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- Marketing, Risk Management, Applied Economics, Hedge Funds

Alfred Cowles' (1934) test of the Dow Theory apparently provided strong evidence against the ability of the ability of Wall Street's mos t famous chartist to forecast the stock market. In this paper, we review Cowles' evidence and find that it supports the contrary conclusion-that the Dow Theory, as applied by its major practitioner, William Peter Hamilton over the period 1902 to 1929, yielded positive risk-adjusted returns. A re-analysis of the Hamilton editorials suggests that timin g strategies based upon the Dow Theory yield high Sharpe ratios and positive alphas.

- by william goetzmann
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- Finance, Stock Market, Sharpe Ratio, Risk Adjustment

The hog option contract has served as a risk management tool for the pork industry for more than 20 years. However, very limited information exists about how this market behaves and how it was affected by the contract redesign of 1996. This paper evaluates the efficiency of hog options markets comparing its pricing function during the live hog contract period to the lean hog contract period.

- by James V Carter
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- Marketing, Risk Management, Capital Asset Pricing Model, Sharpe Ratio

In this paper we consider a decision maker whose utility function has a kink at the reference point with different functions below and above this reference point. We also suppose that the decision maker generally distorts the objective probabilities. First we show that the expected utility function of this decision maker can be approximated by a function of mean and partial moments of distribution. This 'mean-partial moments' utility generalises not only mean-variance utility of Tobin and Markowitz, but also mean-semivariance utility of Markowitz. Then, in the spirit of Arrow and Pratt, we derive an expression for a risk premium when risk is small. Our analysis shows that a decision maker in this framework exhibits three types of aversions: aversion to loss, aversion to uncertainty in gains, and aversion to uncertainty in losses. Finally we present a solution to the optimal capital allocation problem and derive an expression for a portfolio performance measure which generalises the Sharpe and Sortino ratios. We demonstrate that in this framework the decision maker's skewness preferences have first-order impact on risk measurement even when the risk is small.

- by Steen Koekebakker
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- Performance Evaluation, Risk Aversion, Loss Aversion, Sharpe Ratio