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Using efficiency ratio to measure fund performance

Author

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  • Wen-Kuei Chen

    (I-Shou University)

  • Yin-Jen Chen
  • Tsung-Chuan Chen

Abstract

Sharpe ratio and information ratio have been widely used to evaluate mutual fund performance. Both measures compare fund returns to those of certain benchmark portfolios, such as the risk-free rate or the mean return to a pre-designated market index, respectively. Israelsen finds that both measures could generate anomalous ranking when fund returns are negative, and proposes a refined solution. The proposed refinement, however, produces fund rankings that are not necessarily consistent with the dominance rules in mean-variance analysis. This paper proposes a new performance measure, efficiency ratio (ER), which uses the global minimum variance portfolio as the basis for comparison. The ER measure is shown to correct the inconsistency found in Israelsen's modified information ratio.

Suggested Citation

  • Wen-Kuei Chen & Yin-Jen Chen & Tsung-Chuan Chen, 2008. "Using efficiency ratio to measure fund performance," Journal of Asset Management, Palgrave Macmillan, vol. 8(6), pages 352-360, February.
    • Handle: RePEc:pal:assmgt:v:8:y:2008:i:6:d:10.1057_palgrave.jam.2250088
    DOI: 10.1057/palgrave.jam.2250088
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    References listed on IDEAS

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    1. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(4), pages 1851-1872, September.
    2. Craig Israelsen, 2005. "A refinement to the Sharpe ratio and information ratio," Journal of Asset Management, Palgrave Macmillan, vol. 5(6), pages 423-427, April.
    3. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
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    Cited by:

    1. Sebastian Krimm & Hendrik Scholz & Marco Wilkens, 2012. "The Sharpe ratio's market climate bias: Theoretical and empirical evidence from US equity mutual funds," Journal of Asset Management, Palgrave Macmillan, vol. 13(4), pages 227-242, August.

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