Computation of the marginal contribution of Sharpe ratio and other performance ratios
20 Pages Posted: 14 Apr 2021
Date Written: April 11, 2021
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: Suggested Citation