A Sharper Ratio
Degree type
Graduate group
Discipline
Subject
Levy processes
portfolio ranking
Sharpe Ratio
Applied Mathematics
Funder
Grant number
License
Copyright date
Distributor
Related resources
Author
Contributor
Abstract
The Sharpe ratio is the dominant measure for ranking risky assets and funds. This paper derives a generalized ranking measure which, under a regularity condition, is valid in the presence of a much broader assumption (utility, probability) space yet still preserves wealth separation for the broad HARA utility class. Our ranking measure, therefore, can be used with fat tails'' as well as multi-asset class portfolio optimization. We also explore the foundations of asset ranking, including proving a key impossibility theorem: any ranking measure that is valid at non-Normal
higher moments'' cannot generically be free from investor preferences. Finally, we derive a closed-form approximate measure (that can be used without numerical analysis), which nests some previous attempts to include higher moments. Despite the added convenience, we demonstrate that approximation measures are unreliable even with an infinite number of higher moments.