Computation of the marginal contribution of Sharpe ratio and other performance ratios

Eric Benhamou () and Beatrice Guez ()
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Eric Benhamou: MILES - Machine Intelligence and Learning Systems - LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: Computing incremental contribution of performance ratios like Sharpe, Treynor, Calmar or Sterling ratios is of paramount importance for asset managers. Leveraging Euler's homogeneous function theorem, we are able to prove that these performance ratios are indeed a linear combination of individual modified performance ratios. This allows not only deriving a condition for a new asset to provide incremental performance for the portfolio but also to identify the key drivers of these performance ratios. We provide various numerical examples of this performance ratio decomposition.

Keywords: portfolio analysis; recovery and incremental Sharpe ratio; Treynor; Sharpe; Marginal contribution (search for similar items in EconPapers)
Date: 2021-04-11
New Economics Papers: this item is included in nep-cwa and nep-rmg
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