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A uniformly distributed random portfolio

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  • Woo Chang Kim
  • Yongjae Lee

Abstract

In this study, we propose a uniformly distributed random portfolio as an alternative benchmark for portfolio performance evaluation. The uniformly distributed random portfolio is analogous to an enumeration of all feasible portfolios without any prior on the market. Therefore, the relative ranking of a portfolio can be evaluated without peer group information. We derive a closed-form expression for the probability distribution of the Sharpe ratio of a uniformly distributed random portfolio, and conduct comparative analysis with US equity mutual funds. We find that the uniformly distributed random portfolio properly captures the historical performance distribution of equity mutual funds. In addition, we evaluate performance of cap-weighted equity portfolios via uniformly distributed random portfolios.

Suggested Citation

  • Woo Chang Kim & Yongjae Lee, 2016. "A uniformly distributed random portfolio," Quantitative Finance, Taylor & Francis Journals, vol. 16(2), pages 297-307, February.
    • Handle: RePEc:taf:quantf:v:16:y:2016:i:2:p:297-307
    DOI: 10.1080/14697688.2015.1114360
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    Cited by:

    1. Anlan Wang & Aleš Kresta & Tomáš Tichý, 2024. "Evaluation of strategy portfolios," Computational Management Science, Springer, vol. 21(1), pages 1-27, June.
    2. Junhyeong Lee & Inwoo Tae & Yongjae Lee, 2024. "Anatomy of Machines for Markowitz: Decision-Focused Learning for Mean-Variance Portfolio Optimization," Papers 2409.09684, arXiv.org.
    3. Cyril Bachelard & Apostolos Chalkis & Vissarion Fisikopoulos & Elias Tsigaridas, 2024. "Randomized Control in Performance Analysis and Empirical Asset Pricing," Papers 2403.00009, arXiv.org.

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