Incremental Sharpe and Other Performance Ratios
18 Pages Posted: 26 Aug 2018 Last revised: 24 Sep 2018
Date Written: July 26, 2018
We present a new methodology of computing incremental contribution for performance ratios for portfolio like Sharpe, Treynor, Calmar or Sterling ratios. Using Euler's ho- mogeneous function theorem, we are able to decompose these performance ratios as a linear combination of individual modi ed performance ratios. This allows under- standing the drivers of these performance ratios as well as deriving a condition for a new asset to provide incremental performance for the portfolio. We provide various numerical examples of this performance ratio decomposition.
Keywords: C12, G11
JEL Classification: Sharpe, Treynor, recovery, incremental Sharpe ratio, portfolio diversification
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