The expected sharpe ratio of efficient portfolios under estimation errors

Bacem Benjlijel, Hatem Mansali and David McMillan

Cogent Economics & Finance, 2021, vol. 9, issue 1, 1943910

Abstract: This paper aims to develop a feasible estimator of the Sharpe ratio that the investor would expect from estimated efficient portfolios. Based on the analytical expression of the expected Sharpe ratio, we construct an estimator that captures all the errors involved in the estimated efficient portfolios. We conduct a simulation study and find that our estimator delivers the lowest mean square error with comparison to existing estimators. Our result is robust to sample size, to number of assets and to non-normality. It works well, particularly, with short sample sizes. The superior performance of the proposed estimator is confirmed through empirical analysis. The ex-ante method developed in this work allows the investor to assess the value of efficient portfolios before investing capital.

Date: 2021
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DOI: 10.1080/23322039.2021.1943910

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