13 Pages Posted: 5 Apr 2011 Last revised: 20 Feb 2012
Date Written: February 16, 2011
The statistic indicators for the evaluation of the efficiency of a financial instrument, are almost all based on the ratio between mean and variance and the normality of the performance distribution. In most cases, the actual succession of performances during the time (hypothesis of independence) is not taken in consideration.
In this work, after recalling the limits of the mean variance approach for the purposes of the fund selection, a new indicator is proposed to measure the proper risk adjusted performance. Diaman Ratio considers the sequence of performances and it is based on a risk definition consistent with some consolidated results of Behavioural Finance. Diaman Ratio can be interpreted as a persistence indicator of performances: it analyses the trend's power (expected performance) and the ability of the financial instrument to move around its own trend (risk).
Keywords: Sharpe Ratio, Treynor Ratio, Martin Ratio, CAPM, Linear regression, RAP, efficiency, trend persistence
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