Statistical Inference for Sharpe Ratio

Friedrich Schmid and Rafael Schmidt

Chapter 17 in Interest Rate Models, Asset Allocation and Quantitative Techniques for Central Banks and Sovereign Wealth Funds, 2010, pp 337-357 from Palgrave Macmillan

Abstract: Abstract Sharpe ratios (Sharpe 1966) are the most popular risk-adjusted performance measure for investment portfolios and investment funds. Given a riskless security as a benchmark, its Sharpe ratio is defined by S R = μ − z σ 2 $$SR = \frac{{\mu - z}}{{\sqrt {{\sigma ^2}} }}$$ where μ and σ2 denote the portfolio’s mean return and return volatility, respectively, and z represents the riskless return of the benchmark security. From an investor’s point of view, a Sharpe ratio describes how well the return of an investment portfolio compensates the investor for the risk he takes. Financial information systems, for example, publish lists where investment funds are ranked by their Sharpe ratios. Investors are then advised to invest into funds with a high Sharpe ratio. The rationale behind this is that, if the historical returns of two funds are compared to the same benchmark, the fund with the higher Sharpe ratio yields a higher return for the same amount of risk. Though (ex post) Sharpe ratios are computed using historical returns, it is assumed that they have a predictive ability (ex ante). We refer to Sharpe (1994) for related discussions and further references.

Keywords: Excess Return; Asymptotic Variance; Sharpe Ratio; Investment Portfolio; Stochastic Volatility Model (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-25129-8_17

Ordering information: This item can be ordered from
http://www.palgrave.com/9780230251298

DOI: 10.1057/9780230251298_17

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().