Beware the Sharpe Ratio

Christie, Steve

doi:10.2139/ssrn.954631

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Beware the Sharpe Ratio

10 Pages Posted: 2 Jan 2007

See all articles by Steve Christie

Steve Christie

Macquarie University - Department of Applied Finance and Actuarial Studies

Date Written: January 2, 2007

Abstract

Investors often consider Sharpe ratios when making portfolio decisions. Given sampling error in estimated means and variances of returns, simplistic use of Sharpe ratios when choosing between portfolios is extremely ill-advised. In practice, the error in the estimate of the Sharpe ratio will almost certainly be too large to distinguish between the Sharpe ratios of two portfolios. The information ratio suffers similar deficiencies. This is a very short, easy-read summary of longer research papers by the author on the topic.

Keywords: Sharpe ratio, estimation error, GMM, asset allocation, portfolio choice, information ratio

JEL Classification: C1, G1

Suggested Citation: Suggested Citation

Christie, Steve, Beware the Sharpe Ratio (January 2, 2007). Available at SSRN: https://ssrn.com/abstract=954631 or http://dx.doi.org/10.2139/ssrn.954631