Sharpe-like ratios have been traditionally used to measure the performances of portfolio managers. However, they are known to suer major drawbacks. Among them, two are intricate: (1) they are relative to a peer's performance and (2) the best score is generally assumed to correspond to a \good" portfolio allocation, with no guarantee on the goodness of this allocation. Last but not least (3) these measures suer signicant estimation errors leading to the inability to distinguish two managers' performances. In this paper, we propose a cross-sectional measure of portfolio performance dealing with these three issues. First, we dene the score of a portfolio over a single period as the percentage of investable portfolios outperformed by this portfolio. This score quanties the goodness of the allocation remedying drawbacks (1) and (2). The new information brought by the cross-sectionality of this score is then discussed through applications. Secondly, we build a performance index, as the average cross-section score over successive periods, whose estimation partially answers drawback (3). In order to assess its informativeness and using empirical data, we compare its forecasts with those of the Sharpe and Sortino ratios. The results show that our measure is the most robust and informative. It validates the utility of such cross-sectional performance measure.

A Cross-Sectional Performance Measure for Portfolio Management

BILLIO, Monica;
2010-01-01

Abstract

Sharpe-like ratios have been traditionally used to measure the performances of portfolio managers. However, they are known to suer major drawbacks. Among them, two are intricate: (1) they are relative to a peer's performance and (2) the best score is generally assumed to correspond to a \good" portfolio allocation, with no guarantee on the goodness of this allocation. Last but not least (3) these measures suer signicant estimation errors leading to the inability to distinguish two managers' performances. In this paper, we propose a cross-sectional measure of portfolio performance dealing with these three issues. First, we dene the score of a portfolio over a single period as the percentage of investable portfolios outperformed by this portfolio. This score quanties the goodness of the allocation remedying drawbacks (1) and (2). The new information brought by the cross-sectionality of this score is then discussed through applications. Secondly, we build a performance index, as the average cross-section score over successive periods, whose estimation partially answers drawback (3). In order to assess its informativeness and using empirical data, we compare its forecasts with those of the Sharpe and Sortino ratios. The results show that our measure is the most robust and informative. It validates the utility of such cross-sectional performance measure.
File in questo prodotto:
File Dimensione Formato  
10070.pdf

accesso aperto

Tipologia: Documento in Pre-print
Licenza: Accesso libero (no vincoli)
Dimensione 1.13 MB
Formato Adobe PDF
1.13 MB Adobe PDF Visualizza/Apri

I documenti in ARCA sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10278/39275
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact