The Shrinkage Adjusted Sharpe Ratio: An Improved Method for Mutual Fund Selection

Mutual Fund Ratings: What is the Risk in Risk-Adjusted Fund Returns?

Several ̄rms use historical returns to rate or rank the performance of mutual funds, for the bene ̄t of individual investors desiring to invest in one or more of them. Because the past will not exactly repeat itself, such ratings re°ect di®erent notions of \risk" faced by investors. This paper describes and analyzes the performance measures employed by some advisory ̄rms. Approximations are deri...

Selection Neglect in Mutual Fund Advertisements

M utual fund companies selectively advertise their better-performing funds. However, investors respond to advertised performance data as if those data were unselected (i.e., representative of the population). We identify the failure to discount selected or potentially selected data as selection neglect. We examine these phenomena in an archival study (Study 1) and two controlled experiments (St...

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...

When all risk-adjusted performance measures are the same: In praise of the Sharpe ratio

The classical mean-variance investment model is simple, elegant, and popular. As such, it is also subject to criticisms. One unsatisfactory feature of the model is that variance treats the upside and downside equally as risks. In this regard, the downside Lower Partial Moments (LPM) are more attractive as alternative risk measures, since they only penalize the downside. In the meanwhile, consid...

The Sharpe Ratio Indifference Curve