Conditional Sharpe Ratios

23 Pages Posted: 2 Sep 2014

See all articles by Victor Chow

Victor Chow

West Virginia University - Department of Finance

Christine W. Lai

Yuan Ze University

Date Written: August 31, 2014

Abstract

This article demonstrate the connection between Sharpe ratio and stochastic dominance. Conditional Sharpe ratios (CSR) are statistical ordinates of conditional stochastic dominance (CSD) that measure lower partial risk-adjusted excess returns of an asset with respect to return distribution on the benchmark. A multiple comparison of serial CSR statistics thus provides an overall view of portfolio performance corresponding to different market scenarios. An example demonstrates that CSR is able to discriminate funds' downside performance which the conventional Sharpe ratio generally fails to do. A large out-of-sample analysis of US mutual fund shows that CSR has predictability for portfolio future performance.

Keywords: Sharp ratio, information ratio, portfolio management, stochastic dominance

JEL Classification: G11

Suggested Citation

Chow, Victor and Lai, Christine W., Conditional Sharpe Ratios (August 31, 2014). Available at SSRN: https://ssrn.com/abstract=2489764 or http://dx.doi.org/10.2139/ssrn.2489764

Victor Chow (Contact Author)

West Virginia University - Department of Finance ( email )

P. O. Box 6025
Morgantown, WV 26506
United States

Christine W. Lai

Yuan Ze University ( email )

135, Far-East Rd., Chung-Li
Taoyuan, ROC
Taiwan

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