Performance Ratios for Selecting International Portfolios: A Comparative Analysis Using Stock Market Indices in the Euro Area

This paper compares the ability of alternate performance measures to support investment selection in ten-euro area stock markets. The performance ratios used in the paper are grouped in two main categories. One category comprises the performance ratios using risk measures which do not separate systematic and non-systematic risk. The performance measures of this group are Sharpe ratio, Sortino ratio, Rachev ratio and STARR ratio. The other category comprises performance ratios based exclusively on systematic risk given by asset pricing models. The performance ratios of this category are the standard Treynor ratio based on CAPM betas, and two innovations of this ratio, mentioned in the paper by Treynord and Treynoru, based on the betas given by an asset pricing model, highlighted in this paper as Downside-Upside Risk Model (DURM), which estimates separate betas for downside and upside market returns. The empirical part of the paper consists of recursive portfolio selection based on each of the performance ratios mentioned above. The comparison of the ex post returns of the different portfolios shows that portfolios based on Sharpe, Sortino and STARR ratios offer better protection against losses in low return periods in the financial markets of the euro area , while Rachev ratio and Treynor, Treynord and Treynoru ratios are more able to take advantage from high return periods.