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Beware the Sharpe Ratio

Steve Christie

Macquarie University - Applied Finance Centre

January 2, 2007

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.

Number of Pages in PDF File: 10

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

JEL Classification: C1, G1

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Date posted: January 2, 2007  

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

Contact Information

Steve Christie (Contact Author)
Macquarie University - Applied Finance Centre ( email )
Room 732, Building E4A
North Ryde, NSW, 2109
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