On the foundation of performance measures under asymmetric returns

Authors: Pedersen, Christian¹; Satchell, Stephen²

Source: Quantitative Finance, Volume 2, Number 3, June 2002 , pp. 217-223(7)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

We examine two performance measures advocated for asymmetric return distributions: the Sortino ratio—originally introduced by Sortino and Price (Sortino F and Price L 1994 J. Investing 59–65)—and a measure based on power utility introduced in Leland (Leland H 1999 Financial Analysts J. 27–36). In particular, we investigate the role of the maximum principle in this context, and assess the conditions under which the measures satisfy it. Our results add further motivation for the use of a modified Sortino ratio, by placing it on a sound theoretical foundation. In this light, we discuss its relative merits compared with alternative approaches.

Document Type: Research article

DOI: http://dx.doi.org/10.1088/1469-7688/2/3/304

Affiliations: 1: Oliver, Wyman and Company, 1 Neal Street, Covent Garden, London, WC2H 9PU, UK 2: Faculty of Economics and Politics, Cambridge University, UK

Publication date: 2002-06-01