Modified Sharpe Ratio
18 Pages Posted: 15 Mar 2022 Last revised: 28 Mar 2024
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: Suggested Citation