Computation of the marginal contribution of Sharpe ratio and other performance ratios

20 Pages Posted: 14 Apr 2021

See all articles by Eric Benhamou

Eric Benhamou

Université Paris Dauphine; EB AI Advisory; AI For Alpha

Beatrice Guez

AI For Alpha

Date Written: April 11, 2021

Abstract

Computing incremental contribution of performance ratios like Sharpe, Treynor, Calmar or Sterling ratios is of paramount importance for asset managers. Leveraging Euler's homogeneous function theorem, we are able to prove that these performance ratios are indeed a linear combination of individual modified performance ratios. This allows not only deriving a condition for a new asset to provide incremental performance for the portfolio but also to identify the key drivers of these performance ratios. We provide various numerical examples of this performance ratio decomposition.

Keywords: Marginal contribution, Sharpe, Treynor, recovery and incremental Sharpe ratio, portfolio analysis

JEL Classification: C12, G11

Suggested Citation

Benhamou, Eric and Guez, Beatrice, Computation of the marginal contribution of Sharpe ratio and other performance ratios (April 11, 2021). Université Paris-Dauphine Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3824133 or http://dx.doi.org/10.2139/ssrn.3824133

Eric Benhamou (Contact Author)

Université Paris Dauphine ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

EB AI Advisory ( email )

35 Boulevard d'Inkermann
Neuilly sur Seine, 92200
France

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

Beatrice Guez

AI For Alpha ( email )

35 boulevard d'Inkermann
Neuilly sur Seine, 92200
France

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