Volatility-Adjusted Performance: An Alternative Approach to Interpret Long-Run Returns

Abstract:     
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, G32

working papers series