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Upside Beta Ratio: A Performance Measure For Potential-Seeking Investors

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  • DIPANKAR MONDAL

    (Department of Mathematics, Indian Institute of Technology Guwahati, Guwahati 781039, India)

  • N. SELVARAJU

    (Department of Mathematics, Indian Institute of Technology Guwahati, Guwahati 781039, India)

Abstract

This paper proposes a set of desirable axioms to characterize performance measures in the context of portfolio management. A performance measure consistent with the axioms is called “ideal”. We observe that a popular performance measure, Farinelli–Tibiletti (FT) ratio [S. Farinelli & L. Tibiletti (2008) Sharpe thinking in asset ranking with one-sided measures, European Journal of Operational Research 185 (3), 1542–1547], which captures potential-seeking behavior, is not ideal. It violates a very important property of portfolio theory, the diversification. As an alternative, we propose a new ideal performance measure, upside beta ratio (UBR). To examine its performance, we rank mutual funds for UBR and other four performance measures — Sharpe, Sortino, FT and Jensen’s alpha — and then we compare the rankings of UBR with the rankings of other ratios. In addition, the performance of top-ranked funds are compared through back-testing and out-of-sample analysis. Our findings reveal that the UBR performs significantly better than the other ratios in most scenarios. Finally, in order to check robustness of the new measure, a parameter sensitivity analysis is presented.

Suggested Citation

  • Dipankar Mondal & N. Selvaraju, 2020. "Upside Beta Ratio: A Performance Measure For Potential-Seeking Investors," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(02), pages 1-26, April.
    • Handle: RePEc:wsi:ijtafx:v:23:y:2020:i:02:n:s0219024920500144
    DOI: 10.1142/S0219024920500144
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    References listed on IDEAS

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    1. Righi, Marcelo Brutti, 2024. "Star-shaped acceptability indexes," Insurance: Mathematics and Economics, Elsevier, vol. 117(C), pages 170-181.

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