Fatal Flaws of the Sharpe Ratio or How to Make Yourself Look Good
$25
The Sharpe ratio is widely used in investment theory and practice. Although there are numerous statistical issues that severely limit its accuracy, we show two additional problems not yet documented in the literature. One is that Sharpe ratios are higher on an after-tax basis than on a before-tax basis. The other is that Sharpe ratios are higher for leveraged long ETFs than for standard unleveraged long ETFs.
Author: Don M. Chance, CFA, Ph.D.
The Sharpe ratio is widely used in investment theory and practice. Although there are numerous statistical issues that severely limit its accuracy, we show two additional problems not yet documented in the literature. One is that Sharpe ratios are higher than after-tax basis than on a before-tax basis. The other is that Sharpe ratios are higher for leveraged long ETFs than for standard unleveraged long ETFs.
