Incremental Sharpe and Other Performance Ratios

Abstract

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