Abstract

https://ssrn.com/abstract=2837484
 


 



Measuring Portfolio Performance: Sharpe, Alpha, or the Geometric Mean?


Moshe Levy


Hebrew University of Jerusalem - Jerusalem School of Business Administration

September 11, 2016


Abstract:     
The most popular portfolio performance measures are the Sharpe ratio and alpha. While the Sharpe ratio is optimal under the CAPM assumptions of normal return distributions and unlimited borrowing at the risk-free rate, we find that it is not well aligned with investors’ preferences in more realistic settings. Alpha is a poor measure under both the theoretical and the realistic settings. For investors with typical borrowing constraints, the geometric mean provides an alternative measure that is much better than both the Sharpe ratio and alpha. It may very well be the most important single number to consider in portfolio selection.

Keywords: Portfolio Performance, Sharpe Ratio, Alpha, Geometric Mean, Investment Horizon

JEL Classification: G11


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Date posted: September 13, 2016  

Suggested Citation

Levy, Moshe, Measuring Portfolio Performance: Sharpe, Alpha, or the Geometric Mean? (September 11, 2016). Available at SSRN: https://ssrn.com/abstract=2837484 or http://dx.doi.org/10.2139/ssrn.2837484

Contact Information

Moshe Levy (Contact Author)
Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )
Mount Scopus
Jerusalem, 91905
Israel
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