A Cross-Sectional Performance Measure for Portfolio Management

Monica Billio, Ludovic Calès and Dominique Guegan (dominique.guegan@univ-paris1.fr)
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Dominique Guegan: Centre d'Economie de la Sorbonne - Paris School of Economics, https://cv.archives-ouvertes.fr/dominique-guegan

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: Sharpe-like ratios have been traditionally used to measure the performances of portfolio managers. However, they are known to suffer major drawbacks. Among them, two are intricate: (1) they are relative to a peer's performance and (2) the best score is generally assumed to correspond to a "good" portfolio allocation, with no guarantee on the goodness of this allocation. Last but no least (3) these measures suffer significant estimation errors leading to the inability to distinguish two managers' performances. In this paper, we propose a cross-sectional measure of portfolio performance dealing with these three issues. First, we define the score of a portfolio over a single period as the percentage of investable portfolios outperformed by this portfolio. This score quantifies the goodness of the allocation remedying drawbacks (1) and (2). The new information brought by the cross-sectionality of this score is then discussed through applications. Secondly, we build a performance index, as the average cross-section score over successive periods, whose estimation partially answers drawback (3). In order to assess its informativeness and using empirical data, we compare its forecasts with those of the Sharpe and Sortino ratios. The results show that our measure is the most robust and informative. It validates the utility of such cross-sectional performance measure

Keywords: Performance measure; portfolio management; relative-value strategy; large portfolios; absolute return strategy; multivariate statistics; Generalized Hyperbolic Distribution (search for similar items in EconPapers)
JEL-codes: C14 C44 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2010-08
New Economics Papers: this item is included in nep-cse and nep-rmg
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http://mse.univ-paris1.fr/pub/mse/CES2010/10070.pdf (application/pdf)

Related works:
Working Paper: A Cross-Sectional Performance Measure for Portfolio Management (2010)
Working Paper: A Cross-Sectional Performance Measure for Portfolio Management (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:10070

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