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Estimating Future Performance: The Shrinkage-Adjusted Sharpe Ratio

In: Mutual Fund Selection

Author

Listed:
  • Moshe Levy

    (Hebrew University of Jerusalem)

  • Richard Roll

    (Emeritus, UCLA)

Abstract

Estimation error is a central problem in mutual fund selection: past return parameters are very noisy estimates of the corresponding out-of-sample parameters. Fortunately, statistical “shrinkage” can improve estimation. The shrinkage-adjusted Sharpe ratio (SAS) is based on the prescription that shrinkage should usually be applied to the gross sample returns, but not to fees, which are typically known. The SAS significantly improves out-of-sample performance relative to existing methods.

Suggested Citation

  • Moshe Levy & Richard Roll, 2024. "Estimating Future Performance: The Shrinkage-Adjusted Sharpe Ratio," Springer Books, in: Mutual Fund Selection, chapter 0, pages 53-78, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-69758-6_4
    DOI: 10.1007/978-3-031-69758-6_4
    as

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