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A note on the evaluation of long-run investment decisions using the sharpe ratio

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  • Ken Johnston
  • John Hatem
  • Elton Scott

Abstract

This paper reexamines the use of the Sharpe ratio to measure the performance of large and small company stocks along with corporate bonds over different holding periods. It builds on previous research which cites the effects of serial correlation and non-normality in the creation of estimation error in the calculation of the Sharpe ratio. It finds that higher order moments such as skewness and kurtosis are a further source of error that must be accounted for when making inferences about asset performance. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Ken Johnston & John Hatem & Elton Scott, 2013. "A note on the evaluation of long-run investment decisions using the sharpe ratio," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(1), pages 150-157, January.
    • Handle: RePEc:spr:jecfin:v:37:y:2013:i:1:p:150-157
    DOI: 10.1007/s12197-011-9213-8
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    References listed on IDEAS

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    3. Haim Levy, 1972. "Portfolio Performance and the Investment Horizon," Management Science, INFORMS, vol. 18(12), pages 645-653, August.
    4. Norman Strong & Nicholas Taylor, 2001. "Time Diversification: Empirical Tests," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(3‐4), pages 263-302, April.
    5. Yong Bao, 2009. "Estimation Risk-Adjusted Sharpe Ratio and Fund Performance Ranking under a General Return Distribution," Journal of Financial Econometrics, Oxford University Press, vol. 7(2), pages 152-173, Spring.
    6. Bao, Yong & Ullah, Aman, 2006. "Moments of the estimated Sharpe ratio when the observations are not IID," Finance Research Letters, Elsevier, vol. 3(1), pages 49-56, March.
    7. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
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