The Sharp Razor: Performance Evaluation with Non-Normal Returns

45 Pages Posted: 23 Sep 2012 Last revised: 28 Jul 2014

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; AQR Capital Management, LLC

Date Written: September 23, 2012


Because the Sharpe ratio only takes into account the first two moments, it wrongly “translates” skewness and excess kurtosis into standard deviation.

As a result: It deflates the skill measured on “well-behaved” investments (positive skewness, negative excess kurtosis). It inflates the skill measure on “badly-behaved” investments (negative skewness, positive excess kurtosis).

Sharpe ratio estimates need to account for Higher Moments, even if you assume that investors only care about two moments (Markowitz framework).

Keywords: Portfolio selection, Normality, Serial Correlation, Probabilistic Sharpe Ratio, Minimum Track Record Lenght, Sharpe Ratio Efficient Frontier

JEL Classification: C02, G11, G14, D53

Suggested Citation

López de Prado, Marcos, The Sharp Razor: Performance Evaluation with Non-Normal Returns (September 23, 2012). Available at SSRN: or

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States


AQR Capital Management, LLC

One Greenwich Plaza
Greenwich, CT 06830
United States


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