Measuring Performance in a Dynamic World: Conditional Mean-Variance Fundamentals

Posted: 5 May 2006 Last revised: 25 Nov 2013

See all articles by Bob Korkie

Bob Korkie

University of Alberta

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate

Ranjini Jha

University of Waterloo - School of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2006

Abstract

We develop conditional alpha performance measures that are consistent with conditional mean-variance analysis. Commonly employed conditional alpha measures are inconsistent with conditional mean-variance analysis, conditional Sharpe ratio maximization, the magnitude or sign of the true conditional alphas, and reliable time-varying alphas. This conclusion is based on our derivation of the conditional investment opportunity set and its implied conditional alphas for given population parameters. The analysis is not subject to estimation errors and the important issue of whether empirically estimated performance measures violate the bounds on rational stochastic discount factors (Chen and Knez, 1996). An empirical example demonstrates that the differences between existing measures and our proposed measures are substantive for typical parameterizations.

Keywords: Conditional Performance Measurement, Conditional Jensen's Alpha, Conditional Sharpe Ratio, Conditional Appraisal Ratio, and Conditional Mean-Variance Analysis

JEL Classification: G13, G23

Suggested Citation

Korkie, Robert (Bob) and Turtle, Harry J. and Jha, Ranjini, Measuring Performance in a Dynamic World: Conditional Mean-Variance Fundamentals (June 30, 2006). Available at SSRN: https://ssrn.com/abstract=894101 or http://dx.doi.org/10.2139/ssrn.894101

Robert (Bob) Korkie

University of Alberta ( email )

Edmonton, Alberta
Canada
(780) 982-1141 (Phone)

HOME PAGE: http://www.bus.ualberta.ca/bkorkie/

Harry J. Turtle (Contact Author)

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Ranjini Jha

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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