Skill, Horizon and Risk-Adjusted Performance

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There has been considerable recent research on risk-adjusted performance measures as investors have grown more sophisticated, and peered behind absolute performance measures.  An ideal performance measure should adjust for risk, but also provide some indication of the skill of a manager, some indication of how portfolios should be constructed and ideally take into account the full performance history of the manager.  The following work reviews the major risk-adjusted performance measures, highlights deficiencies in the existing range of measures and proposes an alternative that attempts to achieve all three lofty goals in a performance measure.

Author: Arun Muralidhar, Ph.D.

There has been considerable recent research on risk-adjusted performance measures as investors have grown more sophisticated, and peered behind absolute performance measures.  An ideal performance measure should adjust for risk, but also provide some indication of the skill of a manager, some indication of how portfolios should be constructed and ideally take into account the full performance history of the manager.  The following work reviews the major risk-adjusted performance measures, highlights deficiences in the existing range of measures and proposes an alternative that attempts to achieve all three lofty goals in a performance measure.

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