Posted: 16 Oct 2006
Developed here is a value at risk-based measure of portfolio performance called the reward-to-VaR ratio. It is demonstrated that, under normality, the reward-to-VaR ratio gives the same ranking for portfolio performance as the frequently used Sharpe ratio. Under non-normality, the reward-to-VaR ratio at one confidence level may give a ranking for portfolio performance different from the ranking obtained at a different confidence level. This indicates that the risk-taking incentives of a portfolio manager in a VaR-based risk management system can be substantially different from the incentives in a Sharpe ratio-based system.
Keywords: Value-at-risk (VaR), portfolio performance
JEL Classification: G11
Suggested Citation: Suggested Citation
Alexander, Gordon J. and Baptista, Alexandre M., Portfolio Performance Evaluation Using Value at Risk. Journal of Portfolio Management, Vol. 29, pp. 93-102, Summer 2003 . Available at SSRN: https://ssrn.com/abstract=937831