The Dependence of Upside Capture Ratios and Downside Capture Ratios on the Length of the Measurement Interval, Beta, and Alpha

Journal of Investment Management (JOIM), 2014, v12(2), 105-116

Posted: 15 Nov 2014 Last revised: 25 Apr 2016

See all articles by Robert Ferguson

Robert Ferguson

AnswersToGo

Danny Meidan

Independent

Joel Rentzler

City University of New York (CUNY) - Baruch College

Date Written: November 13, 2014

Abstract

Upside and downside capture ratios are used to assess the quality of investment managers and investment strategies. We propose a simple theoretical model which predicts that the upside capture ratio is an increasing function of the measurement interval length and that the downside capture ratio is a decreasing function of the measurement interval length. The model also predicts that all measurement intervals’ capture ratios depend strongly on betas, not just alphas, and that short measurement intervals’ capture ratios are dominated by betas, hence are unreliable for assessing alphas. Consequently, capture ratios are problematic for assessing managers’ skill.

Keywords: Upside capture ratios, downside capture ratios, beta, alpha, performance measurement

JEL Classification: G00

Suggested Citation

Ferguson, Robert and Meidan, Danny and Rentzler, Joel, The Dependence of Upside Capture Ratios and Downside Capture Ratios on the Length of the Measurement Interval, Beta, and Alpha (November 13, 2014). Journal of Investment Management (JOIM), 2014, v12(2), 105-116. Available at SSRN: https://ssrn.com/abstract=2524135

Robert Ferguson (Contact Author)

AnswersToGo ( email )

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Danny Meidan

Independent ( email )

No Address Available
United States

Joel Rentzler

City University of New York (CUNY) - Baruch College ( email )

17 Lexington Avenue
New York, NY 10010
United States

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