Investment Choices and Risk-Adjusted Performance Measures

20 Pages Posted: 11 Apr 2008

See all articles by Mark A. Hooker

Mark A. Hooker

State Street Corporate - Advanced Research Center (ARC)

George Xiang

International College, Renmin University of China

Date Written: August 2007

Abstract

In this paper, we investigate how the combination of investment choices and weak assumptions regarding utility maximization implicitly define a risk-adjusted performance measure (RAPM). An investment choice comprises how an investment is funded, its risk and return attributes, and its financial instrument and market. Our framework demonstrates that a RAPM has many equivalent forms for a given investment choice, but an investor's risk aversion doesn't affect RAPM selection, i.e., the shape of utility function is irrelevant to RAPM selection, and investors with different funding types should use different RAPMs even if they have the same expected utility. We derive some new RAPMs, and our results provide some context for - and we highlight some implicit assumptions behind - several existing RAPMs such as the Sharpe, Information, Treynor, and the Conditional Sharpe ratios.

Keywords: Asset Pricing, Risk-adjusted Performance Measure, Investment Choice and Risk Measure

JEL Classification: B23, D81, C51, C63, G11, G12

Suggested Citation

Hooker, Mark A. and Xiang, George, Investment Choices and Risk-Adjusted Performance Measures (August 2007). Available at SSRN: https://ssrn.com/abstract=1118100 or http://dx.doi.org/10.2139/ssrn.1118100

Mark A. Hooker

State Street Corporate - Advanced Research Center (ARC) ( email )

One Lincoln Street
Boston, MA 02111-2900
United States

George Xiang (Contact Author)

International College, Renmin University of China ( email )

158 Renai Road
Suzhou Industrial Park
Suzhou, Jinsu 215123
China
0512--6260 5288 (Phone)

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