Conditional Sharpe Ratios
23 Pages Posted: 2 Sep 2014
Date Written: August 31, 2014
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
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