Sharpe Thinking with Asymmetrical Preferences

Sharpe thinking in asset ranking with one-sided measures

If we exclude the assumption of normality in return distributions, the classical risk–reward Sharpe Ratio becomes a questionable tool for ranking risky projects. In line with Sharpe thinking, a general risk–reward ratio suitable to compare skewed returns with respect to a benchmark is introduced. The index includes asymmetrical information on: (1) ‘‘good’’ volatility (above the benchmark) and ‘...

The Sharpe Ratio and Preferences: a Parametric Approach

We use a log-normal framework to examine the effect of preferences on the market price for risk, that is, the Sharpe ratio. In our framework, the Sharpe ratio can be calculated directly from the elasticity of the stochastic discount factor with respect to consumption innovations as well as the volatility of consumption innovations. This can be understood as an analytical shortcut to the calcula...

A stochastic model for reproductive isolation under asymmetrical mating preferences

More and more evidence shows that mating preference is a mechanism that can lead to a reproductive isolation event. In this paper, we consider a haploid population living on two patches linked by migration. Individuals are ecologically and demographically neutral on the space and differ only on a trait, a or A, determining both mating success and migration rate. The special feature of this pape...

Sharpe Ratio Practice Note

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...