Upside and Downside Capture Ratios: How to Make Them Come out the Way You Want

29 Pages Posted: 25 Aug 2017

See all articles by Robert Ferguson

Robert Ferguson

AnswersToGo

Danny Meidan

Independent

Joel Rentzler

City University of New York (CUNY) - Baruch College

Date Written: June 24, 2014

Abstract

Upside and downside capture ratios are used to assess the quality of investment managers and investment strategies. We propose a 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, but offer investment managers a wonderful opportunity to mislead clients.

Keywords: Capture Ratio, Upside, Downside, Performance Measurement, Alpha, Investment Management

JEL Classification: G00, G11, G19

Suggested Citation

Ferguson, Robert and Meidan, Danny and Rentzler, Joel, Upside and Downside Capture Ratios: How to Make Them Come out the Way You Want (June 24, 2014). Available at SSRN: https://ssrn.com/abstract=3024136 or http://dx.doi.org/10.2139/ssrn.3024136

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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