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A correction for classic performance measures

Author

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  • Hayette Gatfaoui

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

Abstract

Non normality in asset returns is now a common feature of financial markets. However, many practitioners as well as investors do still refer to classic risk adjusted performance measures to assess their investment. For example, Sharpe and Treynor ratios are designed for a Gaussian world. Then, employing them for a performance assessment prospect relative to the risk borne is a biased approach. If we look for consistency in risk assessment and in asset performance valuation, we need to look for robust methods or tools. Moreover, the well known mathematical consistency and numerical tractability concerns drive our preference for simple methods. Under this setting, we propose to account in a simple way and to some extent for the skewness and kurtosis patterns describing the deviations from normality. We propose therefore adjusted versions of Sharpe and Treynor ratios, which account for the downside and upside deviation risk from the mean values of asset returns.

Suggested Citation

  • Hayette Gatfaoui, 2012. "A correction for classic performance measures," Post-Print hal-00809485, HAL.
    • Handle: RePEc:hal:journl:hal-00809485
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    Cited by:

    1. Hayette Gatfaoui, 2010. "Deviation from normality and Sharpe ratio behavior: a brief simulation study," Post-Print hal-00568613, HAL.
    2. Adegbemi Babatunde Onakoya & Adedotun Victor Seyingbo, 2017. "Financial Markets Integration: Appraising the Developed and Emerging Markets Nexus," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 613-624.

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