Risk-Adjusted Performance Measures and Implied Risk-Attitudes
23 Pages Posted: 5 Nov 2001
Date Written: November 1, 2001
In this article we study the relation between performance measures and preferences functions. In particular, we examine to what extent performance measures can be used as alternatives for preference functions. We study the Sharpe ratio, Sharpe's alpha, the expected return measure, the Sortino ratio, the Fouse index, and the upside potential ratio. We find that the first three measures correspond to the preferences of investors with a low degree of risk aversion, whereas the latter three measures correspond to the preferences of investors with intermediate and high degrees of risk aversion.
Keywords: Performance measurement, risk aversion, preference functions, Sharpe ratio, Sortino ratio, upside potential ratio, mutual funds
JEL Classification: G11, G14, D81
Suggested Citation: Suggested Citation