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Performance Measurement via Random Portfolios

23 Pages Posted: 11 Dec 2004  

Patrick Burns

Burns Statistics

Date Written: December 2, 2004

Abstract

Problems with performance measurement using information ratios relative to a benchmark are exposed. Random portfolios (that obey constraints but disregard utility) are shown to measure investment skill effectively. Investment mandates can also be based on random portfolios - this allows active fund managers more freedom to implement their ideas, and provides the investor more flexibility to gain utility. The issue of the proper attitude towards tracking error is broached, but left largely undecided. There is also a critique of Fisher's method of combining p-values that shows Stouffer's method to be preferable.

Suggested Citation

Burns, Patrick, Performance Measurement via Random Portfolios (December 2, 2004). Available at SSRN: https://ssrn.com/abstract=630123 or http://dx.doi.org/10.2139/ssrn.630123

Patrick J. Burns (Contact Author)

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