On Simple Indicators of Investment Performance

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This article reviews several criticisms to the Sharpe Ratio and shows strong and weak points in several proposed modifications and alternatives (such as the Sortino Ratio) to this popular measure of investment risk-adjusted performance. In particular, the article focuses on the counter-intuitive behavior of the Sharpe Ratio after extended bear markets.

Author: Michele Gambera, Ph.D.

This article reviews several criticisms to the Sharpe Ratio and shows strong and weak points in several proposed modifications and alternatives (such as the Sortino Ratio) to this popular measure of investment risk-adjusted performance. In particular, the article focuses on the counter-intuitive behavior of the Sharpe Ratio after extended bear markets. In addition, it shows an original rearrangement of the Treynor Ratio, proving analytically that if two investments have the same Sharpe Ratio, the one with lower R-square always has a higher Treynor Ratio.  Moreover, this article argues that the Morningstar Rating, together with a fundamental approach, is a better way to choose an investment vehicle for a portfolio.

 

On Simple Indicators of Investment Performance.

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