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A note on the relationships between some risk‐adjusted performance measures

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  • Donald Lien

Abstract

Assuming portfolio returns are normally distributed, it is shown that both Sortino ratio (SR) and upside potential ratio (UPR) are monotonically increasing functions of the Sharpe ratio. As a result, all three risk‐adjusted performance measures provide identical ranking among investment alternatives. The effects of skewness and kurtosis are then evaluated within the Edgeworth‐Sargan density family. For the Sortino ratio, the above conclusion remains valid in the presence of negative skewness or excessive kurtosis. Similar results apply to the UPR with modifications. For all other cases, both SR and UPR provide exactly opposite ranking among investment alternatives to that suggested by the Sharpe ratio when the Sharpe ratio is large. Applications to futures hedging are discussed. Specifically, it is found that the Sharpe ratio may frequently lead to a smaller futures position than the other two ratios. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:483–495, 2002

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  • Donald Lien, 2002. "A note on the relationships between some risk‐adjusted performance measures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(5), pages 483-495, May.
    • Handle: RePEc:wly:jfutmk:v:22:y:2002:i:5:p:483-495
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    Cited by:

    1. Pirgaip, Burak & Arslan-Ayaydin, Özgür & Karan, Mehmet Baha, 2021. "Do Sukuk provide diversification benefits to conventional bond investors? Evidence from Turkey," Global Finance Journal, Elsevier, vol. 50(C).
    2. Hayette Gatfaoui, 2010. "Deviation from normality and Sharpe ratio behavior: a brief simulation study," Post-Print hal-00568613, HAL.
    3. Ruschelle Sgammini, 2023. "A Comparative Risk-adjusted Performance Evaluation of South African SRI Funds and the FTSE/JSE over the Covid-19 Period," International Journal of Economics and Financial Issues, Econjournals, vol. 13(1), pages 46-55, January.

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