Sufficient Conditions for Expected Utility to Imply Drawdown-Based Performance Rankings

18 Pages Posted: 27 Nov 2009 Last revised: 10 Jun 2013

See all articles by Frank Schuhmacher

Frank Schuhmacher

University of Applied Sciences and Technology Aachen (RWTH Aachen)

Martin Eling

University of St. Gallen - Institute of Insurance Economics; University of Saint Gallen - School of Finance (SoF)

Date Written: February 23, 2010

Abstract

The least restrictive sufficient condition for expected utility to imply Sharpe ratio rankings is the location and scale (LS) condition (see Meyer, 1987). The LS condition includes the normal and many other (asymmetric and leptokurtic) distributions commonly used in finance. In this paper we argue that this condition is also sufficient for expected utility to imply drawdown-based performance measure rankings because for investment funds satisfying the LS condition, it does not matter whether funds are ranked with the Sharpe ratio or with a drawdown-based performance measure as the rankings are identical. Hence, the same conditions that provide an expected utility foundation for the Sharpe ratio also provide an expected utility foundation for drawdown-based performance measures. Theoretically drawdown-based performance measures are as good as the Sharpe ratio.

Keywords: Asset management, Performance measurement, Sharpe ratio, Calmar ratio, Drawdown, Location and scale condition, Positive homogeneity

JEL Classification: D81, G1, G11, G23, G29

Suggested Citation

Schuhmacher, Frank and Eling, Martin, Sufficient Conditions for Expected Utility to Imply Drawdown-Based Performance Rankings (February 23, 2010). Available at SSRN: https://ssrn.com/abstract=1512586 or http://dx.doi.org/10.2139/ssrn.1512586

Frank Schuhmacher

University of Applied Sciences and Technology Aachen (RWTH Aachen) ( email )

Templegraben 64
Aachen
Germany

Martin Eling (Contact Author)

University of St. Gallen - Institute of Insurance Economics ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

University of Saint Gallen - School of Finance (SoF) ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
163
Abstract Views
722
rank
180,048
PlumX Metrics