A Second-order Monotone Modification of the Sharpe Ratio

Mikhail Zhitlukhin

Chapter 10 in Recent Advances in Financial Engineering 2014:Proceedings of the TMU Finance Workshop 2014, 2016, pp 217-226 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The Sharpe ratio is not monotone: an investment strategy which yields a higher return may have a lower Sharpe ratio. This may lead to suboptimal investment decisions.In this paper we present a modification of the Sharpe ratio, which is monotone with respect to second-order stochastic dominance. We study its properties and obtain a representation which allows to compute it in an efficient way.

Keywords: Financial Engineering; Mathematical Finance; Money & Banking; Risk Management; Real Option; Corporate Finance; Computational Finance (search for similar items in EconPapers)
Date: 2016
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