A Cross-Sectional Performance Measure for Portfolio Management

CES Working Paper No. 2010-70

32 Pages Posted: 9 May 2012

See all articles by Monica Billio

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia

Ludovic Calès

European Union - European Commission, Joint Research Centre

Dominique Guegan

Université Paris I Panthéon-Sorbonne

Date Written: August 10, 2010

Abstract

Sharpe-like ratios have been traditionally used to measure the performances of portfolio managers. However, they are known to suffer major drawbacks. Among them, two are intricate: (1) they are relative to a peer's performance and (2) the best score is generally assumed to correspond to a "good" portfolio allocation, with no guarantee on the goodness of this allocation. Last but not least (3) these measures suffer significant estimation errors leading to the inability to distinguish two managers' performances. In this paper, we propose a cross-sectional measure of portfolio performance dealing with these three issues. First, we define the score of a portfolio over a single period as the percentage of investable portfolios outperformed by this portfolio. This score quantifies the goodness of the allocation remedying drawbacks (1) and (2). The new information brought by the cross-sectionality of this score is then discussed through applications. Secondly, we build a performance index, as the average cross-section score over successive periods, whose estimation partially answers drawback (3). In order to assess its informativeness and using empirical data, we compare its forecasts with those of the Sharpe and Sortino ratios. The results show that our measure is the most robust and informative. It validates the utility of such cross-sectional performance measure.

Keywords: Performance Measure, Portfolio Management, Relative-Value Strategy, Large Portfolios, Absolute Return Strategy, Multivariate Statistics, Generalized Hyperbolic Distribution

JEL Classification: C13, C21, C40, C63

Suggested Citation

Billio, Monica and Calès, Ludovic and Guegan, Dominique, A Cross-Sectional Performance Measure for Portfolio Management (August 10, 2010). CES Working Paper No. 2010-70. Available at SSRN: https://ssrn.com/abstract=2055135 or http://dx.doi.org/10.2139/ssrn.2055135

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Ludovic Calès (Contact Author)

European Union - European Commission, Joint Research Centre ( email )

Via E. Fermi 2749
Ispra (VA), I-21027
Italy

Dominique Guegan

Université Paris I Panthéon-Sorbonne ( email )

106 avenue de lhopital
75634 Paris Cedex 13
Paris, IL
France

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