Maximum Certain Equivalent Excess Returns and Equivalent Preference Criteria Part I - Theory

Jacques Pézier ()
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Jacques Pézier: ICMA Centre, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: Generalizations of traditional preference criteria such as the Sharpe ratio, the information ratio and the Jensen alpha are obtained by maximizing a certain equivalent excess return (CER) under relevant investment conditions. They are increasing functions of CERs and therefore equivalent criteria. They are consistent with utility theory and are applicable to any investment choice. That is not the case for many other popular preference criteria (e.g., Omega index, Sortino ratio, expected shortfall and so-called 'coherent' preference criteria). Most are incompatible with expected utility maximization and therefore best avoided.

Keywords: Certain equivalent excess return; risk adjusted performance measures; risk aversion; power utility functions; coherent risk measures; spectral indices; Sharpe ratio; generalized Sharpe ratio; information ratio; Treynor ratio; Jensen alpha; skewness; kurtosis; downside risk measures; expected shortfall; Sortino ratio; Omega ratio (search for similar items in EconPapers)
JEL-codes: D80 D81 G10 G11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-08, Revised 2008-12
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