Modified Sharpe Ratio

18 Pages Posted: 15 Mar 2022 Last revised: 28 Mar 2024

See all articles by Marta Vidal

Marta Vidal

Universidad Europea de Madrid; Universidad Complutense de Madrid (UCM)

Javier Vidal-García

Complutense University of Madrid; Harvard University

Date Written: March 15, 2024

Abstract

Using a large sample of mutual funds across 35 countries around the world for the 1990-2023 time period, we examine and propose a new ratio, which starts from the Sharpe's original ratio and substitutes the absolute return premium of the numerator of the Sharpe ratio for a relative premium, we resolve the inconsistency related to the inadequate treatment of risk in the original Sharpe ratio for certain circumstances. There are situations that can occur in financial markets without apparent logic in the long term in which the application of the original Sharpe ratio can lead to inconsistencies in portfolio evaluation based on its efficiency. To solve this issue, we present an alternative Sharpe ratio that overcomes these inconsistencies without violating the basic principles on which is inspired the original Sharpe ratio.

Keywords: Mutual Funds; Sharpe Ratio; Portfolio Management; Short-Term Performance

JEL Classification: G11, G12

Suggested Citation

Vidal, Marta and Vidal-García, Javier and Vidal-García, Javier, Modified Sharpe Ratio (August 15, 2023). Available at SSRN: https://ssrn.com/abstract=4057728 or http://dx.doi.org/10.2139/ssrn.4057728

Marta Vidal

Universidad Europea de Madrid ( email )

Villaviciosa de Odón
Madrid, 28670
Spain

Universidad Complutense de Madrid (UCM) ( email )

Somosaguas Campus
Madrid, 28223
Spain

Javier Vidal-García (Contact Author)

Complutense University of Madrid ( email )

School of Business Administration
Somosaguas Campus
Madrid, Madrid 28223
Spain

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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