Reinterpreting the Sharpe Ratio as a Measure of Investment Return from Alpha

Implications of the Sharpe Ratio as a Performance Measure in Multi-Period Settings

We study effects of using Sharpe ratio as a performance measure for compensating money managers in a dynamic and frictionless market setting. First, we demonstrate that with such a performance measure, the manager’s focus on the short horizon performance is detrimental to the investor’s long horizon performance. Numerical experiments illustrate that when returns are iid, the performance loss is...

How to Measure Return on Investment

As a result of the increasing pressure on health care expenditures calculations of the return on investment (ROI) have been attempted in assessing the utility of medical equipment purchases. The measurement of ROI requires an in-depth analysis of equipment cost, cost structure, and medical processes. ROI analysis in health care is more complicated and error-prone than in most other industries. ...

The Sharpe Ratio Efficient Frontier

We evaluate the probability that an estimated Sharpe ratio exceeds a given threshold in presence of non-Normal returns. We show that this new uncertainty-adjusted investment skill metric (called Probabilistic Sharpe ratio, or PSR) has a number of important applications: First, it allows us to establish the track record length needed for rejecting the hypothesis that a measured Sharpe ratio is b...

The Sharpe Ratio Indifference Curve

Notes on the Sharpe ratio

Herein is an incomplete collection of facts about the Sharpe ratio, and the Sharpe ratio of the Markowitz portfolio. Connections between the Sharpe ratio and the t-test, and between the Markowitz portfolio and the Hotelling T 2 statistic are explored. Many classical results for testing means can be easily translated into tests on assets and portfolios. A ‘unified’ framework is described which c...