Risk-Adjusted Performance Measures and Implied Risk Attitudes

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The authors examine the relationship between performance measures and preference functions.  In particular, they look at the implied risk attitudes in performance measures; the Sharpe Ratio, Sharpe’s Alpha, the expected return measure, the Sortino Ratio, the Fouse Index, and the Upside Potential Ratio.  By comparing rankings based on these measures with those based on the preference function, they found that the first three measures correspond to the preferences of investors with a low degree of risk aversion, whereas the latter three measures correspond to the preferences of investors with intermediate and high degrees of risk aversion.

Author: Auke Plantinga, Ph.D., J. Sebastiaan de Groot

The authors examine the relationship between performance measures and preference functions.  In particular, they look at the implied risk attitudes in performance measures; the Sharpe Ratio, Sharpe's Alpha, the expected return measure, the Sortino Ratio, the Fouse Index, and the Upside Potential Ratio.  By comparing rankings based on these measures with those based on the preference function, they found that the first three measures correspond to the preferences of investors with a low degree of risk aversion, whereas the latter three measures correspond to the preferences of investors with intermediate and high degrees of risk aversion.

 

Risk-Adjusted Performance Measures and Implied Risk Attitudes

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