 Portfolio performance evaluation with generalized Sharpe ratios: Beyond the mean and varianceValeri Zakamouline and Steen Koekebakker () Journal of Banking & Finance, 2009, vol. 33, issue 7, 1242-1254 Abstract: This paper presents a theoretically sound portfolio performance measure that takes into account higher moments of distribution. This measure is motivated by a study of the investor's preferences to higher moments of distribution within Expected Utility Theory and an approximation analysis of the optimal capital allocation problem. We show that this performance measure justifies the notion of the Generalized Sharpe Ratio (GSR) introduced by Hodges (1998). We present two methods of practical estimation of the GSR: nonparametric and parametric. For the implementation of the parametric method we derive a closed-form solution for the GSR where the higher moments are calibrated to the normal inverse Gaussian distribution. We illustrate how the GSR can mitigate the shortcomings of the Sharpe ratio in resolution of Sharpe ratio paradoxes and reveal the real performance of portfolios with manipulated Sharpe ratios. We also demonstrate the use of this measure in the performance evaluation of hedge funds. Keywords: Sharpe; ratio; Skewness; Kurtosis; Portfolio; performance; evaluation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:7:p:1242-1254 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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