Volatility-Adjusted Performance: An Alternative Approach to Interpret Long-Run Returns
Jan Bo Jakobsen
Copenhagen Business School
The Brattle Group
WP EFMA Athens 2000
This paper demonstrates the advantages of using volatility-adjusted performance measures compared to buy-and-hold returns to interpret long-run returns. We arrive at the volatility-adjusted performance measure by decomposing the expected cross-sectional buy-and-hold returns into transformed mean components and volatility components. This decomposition shows that due to Jensen's inequality the volatility component contributes positively to the right-skewed buy-and-hold returns. The significance of the volatility-adjusted performance measure
is improved testing of long-run returns.
Number of Pages in PDF File: 38
JEL Classification: G14, G32working papers series
Date posted: June 21, 2000
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