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Using efficiency ratio to measure fund performance

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Abstract:

Sharpe ratio and information ratio have been widely used to evaluate mutual fund performance. Both measures compare fund returns to those of certain benchmark portfolios, such as the risk-free rate or the mean return to a pre-designated market index, respectively. Israelsen finds that both measures could generate anomalous ranking when fund returns are negative, and proposes a refined solution. The proposed refinement, however, produces fund rankings that are not necessarily consistent with the dominance rules in mean-variance analysis. This paper proposes a new performance measure, efficiency ratio (ER), which uses the global minimum variance portfolio as the basis for comparison. The ER measure is shown to correct the inconsistency found in Israelsen's modified information ratio.Journal of Asset Management (2008) 8, 352–360. doi:10.1057/palgrave.jam.2250088

Document Type: Research Article

DOI: http://dx.doi.org/10.1057/palgrave.jam.2250088

Publication date: February 1, 2008

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