Past Returns and the Perceived Sharpe Ratio

39 Pages Posted: 1 Dec 2014 Last revised: 5 Feb 2018

See all articles by Guy Kaplanski

Guy Kaplanski

Bar-Ilan University - Graduate School of Business Administration

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration; Fordham University

Chris Veld

Monash University

Yulia V. Veld-Merkoulova

Monash University - Department of Finance; Financial Research Network (FIRN)

Date Written: March 16, 6

Abstract

We find that human perception contradicts the market efficiency assertions that high return is accompanied by high risk and that past returns do not affect future prices. A survey of investors reveals that the last week realized returns are positively correlated with perceived returns and negatively correlated with perceived risk. Thus, in the human mind there is a free lunch opportunity, where the perceived Sharpe ratio is positively correlated with short-term past returns. As higher perceived Sharpe ratios are also followed by more actual stock buying, our study provides a novel explanation to the observed short-term autocorrelations in stock returns.

Keywords: Expected return; Perceived risk; Perceived Sharpe ratio; stock return autocorrelations

JEL Classification: D81, G02, G10, G14

Suggested Citation

Kaplanski, Guy and Levy, Haim and Veld, Chris and Veld-Merkoulova, Yulia V., Past Returns and the Perceived Sharpe Ratio (March 16, 6). Journal of Economic Behavior and Organization,(2016) , Volume 123, 149-167., Available at SSRN: https://ssrn.com/abstract=2532127 or http://dx.doi.org/10.2139/ssrn.2532127

Guy Kaplanski (Contact Author)

Bar-Ilan University - Graduate School of Business Administration ( email )

Ramat Gan
Israel

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~mshlevy/

Fordham University ( email )

140 West 62nd Street
New York, NY 10023
United States

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

Yulia V. Veld-Merkoulova

Monash University - Department of Finance ( email )

Building H
Caulfield, Victoria 3145
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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