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
Date Written: November 13, 2014
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: Suggested Citation