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1
Van Dyk, Francois, Gary Van Vuuren, and Andre Heymans. "The Bias Ratio As A Hedge Fund Fraud Indicator: An Empirical Performance Study Under Different Economic Conditions." International Business & Economics Research Journal (IBER) 13, no. 4 (June 30, 2014): 867. http://dx.doi.org/10.19030/iber.v13i4.8698.
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The Sharpe ratio is widely used as a performance evaluation measure for traditional (i.e., long only) investment funds as well as less-conventional funds such as hedge funds. Based on mean-variance theory, the Sharpe ratio only considers the first two moments of return distributions, so hedge funds characterised by complex, asymmetric, highly-skewed returns with non-negligible higher moments may be misdiagnosed in terms of performance. The Sharpe ratio is also susceptible to manipulation and estimation error. These drawbacks have demonstrated the need for augmented measures, or, in some cases, replacement fund performance metrics. Over the period January 2000 to December 2011 the monthly returns of 184 international long/short (equity) hedge funds with investment mandates that span the geographical areas of North America, Europe, and Asia were examined. This study compares results obtained using the Sharpe ratio (in which returns are assumed to be serially uncorrelated) with those obtained using a technique which does account for serial return correlation. Standard techniques for annualising Sharpe ratios, based on monthly estimators, do not account for serial return correlation this study compares Sharpe ratio results obtained using a technique which accounts for serial return correlation. In addition, this study assess whether the Bias ratio supplements the Sharpe ratio in the evaluation of hedge fund risk and thus in the investment decision-making process. The Bias and Sharpe ratios were estimated on a rolling basis to ascertain whether the Bias ratio does indeed provide useful additional information to investors to that provided solely by the Sharpe ratio.
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Iqbal, Javed, Moeed Ahmad Sandhu, Shaheera Amin, and Aliya Manzoor. "Portfolio Selection and Optimization through Neural Networks and Markowitz Model: A Case of Pakistan Stock Exchange Listed Companies." Review of Economics and Development Studies 5, no. 1 (March 30, 2019): 183–96. http://dx.doi.org/10.26710/reads.v5i1.354.
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This paper used artificial neural networks (ANNs) time series predictor for approximating returns of Pakistan Stock Exchange (PSX) listed 100 companies. These projected returns are then substituted into expected returns in the Markowitz’s Mean Variance (MV) portfolio Model. For comparison empirical data used is closing prices of PSX listed stocks, Karachi Inter Bank Offer Rates (KIBOR) as risk free rate and KSE-all share index as benchmark. The Portfolio returns are compared for two datasets by employing various constraints like budget, transaction costs, and turnover constraints. The value of portfolios is measured through Sharpe ratio and Information ratio. Both Sharpe and Information ratios support use of ANNs as return predictor and optimisation tool over simple MV model implemented for empirical data as well as predicted data. ANNs framework performed better in both Long and Short positions and its portfolio returns are significantly higher as compared with MV.
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Van Dyk, Francois, Gary Van Vuuren, and Andre Heymans. "Hedge Fund Performance Evaluation Using The Sharpe And Omega Ratios." International Business & Economics Research Journal (IBER) 13, no. 3 (April 28, 2014): 485. http://dx.doi.org/10.19030/iber.v13i3.8588.
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The Sharpe ratio is widely used as a performance evaluation measure for traditional (i.e., long only) investment funds as well as less-conventional funds such as hedge funds. Based on mean-variance theory, the Sharpe ratio only considers the first two moments of return distributions, so hedge funds characterised by asymmetric, highly-skewed returns with non-negligible higher moments may be misdiagnosed in terms of performance. The Sharpe ratio is also susceptible to manipulation and estimation error. These drawbacks have demonstrated the need for augmented measures, or, in some cases, replacement fund performance metrics. Over the period January 2000 to December 2011 the monthly returns of 184 international long/short (equity) hedge funds with geographical investment mandates spanning North America, Europe, and Asia were examined. This study compares results obtained using the Sharpe ratio (in which returns are assumed to be serially uncorrelated) with those obtained using a technique which does account for serial return correlation. Standard techniques for annualising Sharpe ratios, based on monthly estimators, do not account for this effect. In addition, this study assesses whether the Omega ratio supplements the Sharpe Ratio in the evaluation of hedge fund risk and thus in the investment decision-making process. The Omega and Sharpe ratios were estimated on a rolling basis to ascertain whether the Omega ratio does indeed provide useful additional information to investors to that provided by the Sharpe ratio alone.
4
Alvi, Jahanzaib, Muhammad Rehan, and Sania Saeed. "Modified Sharpe Ratio Application in Calculation of Mutual Fund Star Ranking." Global Journal of Business, Economics and Management: Current Issues 10, no. 1 (March 30, 2020): 58–82. http://dx.doi.org/10.18844/gjbem.v10i1.4714.
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Purpose of this study is to apply to modify Sharpe Ratio to calculate Star Ranking of Equity-based mutual funds registered in Mutual Fund Association of Pakistan, further, the idea was to recalibrate locally developed models being used in Pakistan by autonomous professional bodies who professionally assigns star ranking of mutual funds, equity market exhibited negative returns from July 2017 onwards this research which brought the problem to assign star ranking due to model structure, model relies on risk-adjusted return (Sharpe Ratio), therefore Sharpe Ratio has a limitation in negative excess return. Two developed models were simultaneously compared to witness the predictive power of these models, (1) modified Sharpe and (2) VIS Credit Rating Company (Explaining the Stars) Model. Data was collected from March 2013 to March 2018 quarterly and the exercise was done quarterly. Findings revealed a magnificent piece of work, (1) there is no difference between model 1 and model 2 by both way results exhibited same mutual fund star rankings, (2) both methods have a different way of calculating final score with same results, and (3) modified Sharpe ratio is quite well when excess return is negative but when there is a mix of negative and positive better to use VIS model as well as in positive excess returns. A research paper could not calibrate other models developed by rating companies (Pakistan Credit Rating Company) which is a future research gap.
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Savor, Pavel, and Mungo Wilson. "How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements." Journal of Financial and Quantitative Analysis 48, no. 2 (April 2013): 343–75. http://dx.doi.org/10.1017/s002210901300015x.
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AbstractStock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement-day excess return from 1958 to 2009 is 11.4 basis points (bp) versus 1.1 bp for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is 10 times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.
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Abbas Zaidi, Syed Zakir. "Performance Appraisal of Open-ended Equity Funds in Pakistan: An alternative Approaches of Performance Measure." Jinnah Business Review 8, no. 1 (January 1, 2020): 18–40. http://dx.doi.org/10.53369/vogg5707.
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There are more than one hundred portfolio performances, which have been proposed in financial literature, (Cogneau and Hubner, 2009), but extensively used performance measure is a Sharpe ratio and in Pakistan Asset Management Companies (AMCs) also prefer to exhibit their performance in Sharpe ratio. However, financial literature has ample of evidence that recommend Sharpe ratio is valid under normal distribution of returns. The financial returns are not distributed normally as result of which standard deviation may not adequately measure risk (Bodie et al., 2009). Whereas, standard deviation of negatively skewed distribution underestimates and positively skewed overestimates volatility that would be misleading Sharpe index. In this study, we concluded that for skewed and non-normal distribution Omega ratio or Sharpe-Omega are alternative performance measures.
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Agrawal, Sakshi. "Financial Statistics and its Behavioral Implications- A Case Study of Select Hospitality Industry." IRA-International Journal of Management & Social Sciences (ISSN 2455-2267) 5, no. 3 (December 30, 2016): 491. http://dx.doi.org/10.21013/jmss.v5.n3.p12.
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<em>The paper deals on Financial Statistics of Hospitality Industry vis Indian Hotels Ltd., Benaras Ltd, Sinclairs Ltd and The Grand Bhagwati Ltd. Looking at their share price and Holding period return did their portfolio and Risk Analysis. Taking their standard deviation, variance and the calculation of Sharpe Ratio did the risk analysis. The time period analyzed was from March 2010 to March 2015. The financial Statistics gives a comfortable position for the investors in terms of Returns and so a comfortable Portfolio Return Risk graph. However, a deeper analysis shows that the Profit after taxes of the respective firms are broadly not in congruence with the statistics and so the respective Returns differs. The paper takes an insight into the Behavioral implications of the Financial Statistics.</em>
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Daniel, Kent, Lira Mota, Simon Rottke, and Tano Santos. "The Cross-Section of Risk and Returns." Review of Financial Studies 33, no. 5 (April 17, 2020): 1927–79. http://dx.doi.org/10.1093/rfs/hhaa021.
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Abstract A common practice in the finance literature is to create characteristic portfolios by sorting on characteristics associated with average returns. We show that the resultant portfolios are likely to capture not only the priced risk associated with the characteristic but also unpriced risk. We develop a procedure to remove this unpriced risk using covariance information estimated from past returns. We apply our methodology to the five Fama-French characteristic portfolios. The squared Sharpe ratio of the optimal combination of the resultant characteristic-efficient portfolios is 2.13, compared with 1.17 for the original characteristic portfolios.
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Liu, Ying, and Ya-Nan Li. "A Parametric Sharpe Ratio Optimization Approach for Fuzzy Portfolio Selection Problem." Mathematical Problems in Engineering 2017 (2017): 1–17. http://dx.doi.org/10.1155/2017/6279859.
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When facing to make a portfolio decision, investors may care more about every portfolio’s performance on a return and risk trade-off. In this paper, a new low partial moment measurement that only punishes the loss risk is defined for selection variables based on L-S integral. Furthermore, a new performance measure for portfolio evaluation is proposed to generalize the Sharpe ratio in the fuzzy context. With the optimal performance criterion, a new parametric Sharpe ratio portfolio optimization model is developed wherein uncertain returns are presented as parametric interval-valued fuzzy variables. To make the proposed model easy to solve, we transform the fractional programming into an equivalent form and solve it with domain decomposition method (DDM). Finally, we apply the proposed performance measure into a portfolio selection problem, compare the computational results in different cases, and analyze the influence of different parameters on the optimal portfolio.
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Zakamulin, Valeriy. "Sharpe (Ratio) Thinking about the Investment Opportunity Set and CAPM Relationship." Economics Research International 2011 (July 12, 2011): 1–9. http://dx.doi.org/10.1155/2011/781760.
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In the presence of a risk-free asset the investment opportunity set obtained via the Markowitz portfolio optimization procedure is usually characterized in terms of the vector of excess returns on individual risky assets and the variance-covariance matrix. We show that the investment opportunity set can alternatively be characterized in terms of the vector of Sharpe ratios of individual risky assets and the correlation matrix. This implies that the changes in the characteristics of individual risky assets that preserve the Sharpe ratios and the correlation matrix do not change the investment opportunity set. The alternative characterization makes it simple to perform a comparative static analysis that provides an answer to the question of what happens with the investment opportunity set when we change the risk-return characteristics of individual risky assets. We demonstrate the advantages of using the alternative characterization of the investment opportunity set in the investment practice. The Sharpe ratio thinking also motivates reconsidering the CAPM relationship and adjusting Jensen's alpha in order to properly measure abnormal portfolio performance.
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King, Jeremy, and Gary Wayne van Vuuren. "Flagging potential fraudulent investment activity." Journal of Financial Crime 23, no. 4 (October 3, 2016): 882–901. http://dx.doi.org/10.1108/jfc-09-2015-0051.
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Purpose This paper aims to investigate the use of the bias ratio as a possible early indicator of financial fraud – specifically in the reporting of hedge fund returns. In the wake of the 2008-2009 financial crisis, numerous hedge funds were liquidated and several cases of financial fraud exposed. Design/methodology/approach Risk-adjusted return metrics such as the Sharpe ratio and Value at Risk were used to raise suspicion for fraud. These metrics, however, assume distributional normality and thus have had limited success with hedge fund returns (a characteristic of which is highly skewed, non-normal return distributions). Findings Results indicate that potential fraud would have been detected in the early stages of the scheme’s life. Having demonstrated the credibility of the bias ratio, it was then applied to several indices and (anonymous) South African hedge funds. The results were used to demonstrate the ratio’s scope and robustness and draw attention to other metrics which could be used in conjunction with it. Results from these multiple sources could be used to justify further investigation. Research limitations/implications The traditional metrics for performance evaluation (such as the Sharpe ratio), assume distributional normality and thus have had limited success with hedge fund returns (a characteristic of which is highly skewed, non-normal return distributions). The bias ratio, which does not rely on normally distributed returns, was applied to a known fraud case (Madoff’s Ponzi scheme). Practical implications The effectiveness of the bias ratio in demonstrating potential suspicious financial activity has been demonstrated. Originality/value The financial market has come under heightened scrutiny in the past decade (2005 – 2015) as a result of the fragile and uncertain economic milieu that still (2015) persists. Numerous risk and return measures have been used to evaluate hedge funds’ risk-adjusted performance, but many fail to account for non-normal return distributions exhibited by hedge funds. The bias ratio, however, has been demonstrated to effectively flag potentially fraudulent funds.
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Maurer, Thomas A., Thuy-Duong Tô, and Ngoc-Khanh Tran. "Pricing Risks Across Currency Denominations." Management Science 65, no. 12 (December 2019): 5308–36. http://dx.doi.org/10.1287/mnsc.2018.3109.
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We use principal component analysis on 55 bilateral exchange rates of 11 developed currencies to identify two important global risk sources in foreign exchange (FX) markets. The risk sources are related to Carry and Dollar but are not spanned by these factors. We estimate the market prices associated with the two risk sources in the cross-section of FX market returns and construct FX market-implied country-specific stochastic discount factors (SDFs). The SDF volatilities are related to interest rates and expected carry trade returns in the cross-section. The SDFs price international stock returns and are related to important financial stress indicators and macroeconomic fundamentals. The first principal risk is associated with the Treasury-EuroDollar (TED) spread, quantities measuring volatility, tail and contagion risks, and future economic growth. It earns a relatively small implied Sharpe ratio. The second principal risk is associated with the default and term spreads and quantities capturing volatility and illiquidity risks. It further correlates with future changes in the long-term interest rate and earns a large implied Sharpe ratio. This paper was accepted by Lauren Cohen, finance.
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Van Dyk, Francois, Gary Van Vuuren, and Andre Heymans. "Hedge Fund Performance Using Scaled Sharpe And Treynor Measures." International Business & Economics Research Journal (IBER) 13, no. 6 (October 31, 2014): 1261. http://dx.doi.org/10.19030/iber.v13i6.8920.
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The Sharpe ratio is widely used as a performance measure for traditional (i.e., long only) investment funds, but because it is based on mean-variance theory, it only considers the first two moments of a return distribution. It is, therefore, not suited for evaluating funds characterised by complex, asymmetric, highly-skewed return distributions such as hedge funds. It is also susceptible to manipulation and estimation error. These drawbacks have demonstrated the need for new and additional fund performance metrics. The monthly returns of 184 international long/short (equity) hedge funds from four geographical investment mandates were examined over an 11-year period.This study contributes to recent research on alternative performance measures to the Sharpe ratio and specifically assesses whether a scaled-version of the classic Sharpe ratio should augment the use of the Sharpe ratio when evaluating hedge fund risk and in the investment decision-making process. A scaled Treynor ratio is also compared to the traditional Treynor ratio. The classic and scaled versions of the Sharpe and Treynor ratios were estimated on a 36-month rolling basis to ascertain whether the scaled ratios do indeed provide useful additional information to investors to that provided solely by the classic, non-scaled ratios.
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Bajracharya, Rajan Bilas. "Mutual fund Performance in Nepalese Mutual fund units: An analysis of Monthly Returns." Journal of Advanced Academic Research 3, no. 2 (February 23, 2017): 92–100. http://dx.doi.org/10.3126/jaar.v3i2.16758.
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Mutual funds dwell in a small market in Nepal. Around seven mutual funds listed in the Nepal stock exchange trade (NEPSE). This paper focused on evaluating the performance of five mutual funds of NEPSE on the basis of monthly returns compared to benchmark return. Risk adjusted performance measures suggested by Jenson, Treynor, Sharpe and statistical models are employed. It is found that, most of the mutual funds have performed better according to Jenson and Treynor measures but not up to the benchmark on the basis of Sharpe ratio. However, few mutual funds are well diversified and have reduced its unique risk. Journal of Advanced Academic Research Vol. 3, No. 2, 2016, Page: 92-100
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Baweja, Meena, Ratnesh R. Saxena, and Deepak Sehgal. "Portfolio Optimization Using Conditional Sharpe Ratio." International Letters of Chemistry, Physics and Astronomy 53 (July 2015): 130–36. http://dx.doi.org/10.18052/www.scipress.com/ilcpa.53.130.
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In this paper we propose a portfolio optimization model that selects the portfolio with the largest worse-case-scenario sharpe ratio with a given confidence level. We highlight the relationship between conditional value-atrisk based sharpe ratio and standard deviation based sharpe ratio proposed in literature. By utilizing the results of Rockafellar and Uryasev [5], we evaluate conditional value- at- risk for each portfolio. Our model is expected to enlarge the application area of practical investment problems for which the original sharpe ratio is not suitable, however should device effective computational methods to solve optimal portfolio selection problems with large number of investment opportunities. Here conditional sharpe ratio is defined as the ratio of expected excess return to the expected shortfall. This optimization considers both risk and return, of which changes will effect the sharpe ratio. That is the fitness function for dynamic portfolio is the objective function of the model.
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Abu-Alkheil, Ahmad, Walayet A. Khan, and Bhavik Parikh. "Risk-Reward Trade-Off and Volatility Performance of Islamic Versus Conventional Stock Indices: Global Evidence." Review of Pacific Basin Financial Markets and Policies 23, no. 01 (March 2020): 2050002. http://dx.doi.org/10.1142/s0219091520500022.
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In this paper, we compare the performance of Islamic stock indices (ISI) and conventional stock indices (CSI) from FTSE, DJ, MSCI, S&Ps and Jakarta series using common risk-return metrics. The sample consists of 64 ISI and CSI, and covers the period from 2002 to 2017. The majority of the stock indices are from the Pacific Rim countries’ stock markets. Additionally, we employ the GARCH-M model to examine the impact of past volatility on spot returns. Findings suggest that the ISI are less sensitive to the average market movements compared to the CSI, but surprisingly offer similar raw returns suggesting primary support for the low risk-high return paradox. On further examination, results reveal that M2, Omega, Sharpe and Treynor measures indicate that ISI underperform CSI while Jensen’s alpha and Sortino ratio put ISI ahead of CSI. Moreover, findings show that pre-crisis winners (CSI) were losers during the 2008 crisis but subsequently recovered and ended up with higher returns than ISI. Findings also show that the previous volatility of stock returns can be potentially used for predicting future returns.
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Bowes, Jordan, and Marcel Ausloos. "Financial Risk and Better Returns through Smart Beta Exchange-Traded Funds?" Journal of Risk and Financial Management 14, no. 7 (June 22, 2021): 283. http://dx.doi.org/10.3390/jrfm14070283.
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Smart beta exchange-traded funds (SB ETFs) have caught the attention of investors due to their supposed ability to offer a better risk–return trade-off than traditionally structured passive indices. Yet, research covering the performance of SB ETFs benchmarked to traditional cap-weighted market indices remains relatively scarce. There is a lack of empirical evidence enforcing this phenomenon. Extending the work of Glushkov (“How Smart are “Smart Beta” ETFs? …”, 2016), we provide a quantitative analysis of the performance of 145 EU-domicile SB ETFs over a 12 year period, from 30 December 2005 to 31 December 2017, belonging to 9 sub-categories. We outline which criteria were retained such that the investigated ETFs had at least 12 consecutive monthly returns data. We consider three models: the Sharpe–Lintner capital asset pricing model, the Fama–French three-factor model, and the Carhart four-factor model, discussed in the literature review sections, in order to assess the factor exposure of each fund to market, size, value, and momentum factors, according to the pertinent model. In order to do so, the sample of SB ETFs and benchmarks underwent a series of numerical assessments in order to aim at explaining both performance and risk. The measures chosen are the Annualised Total Return, the Annualised Volatility, the Annualised Sharpe Ratio, and the Annualised Relative Return (ARR). Of the sub-categories that achieved greater ARRs, only two SB categories, equal and momentum, are able to certify better risk-adjusted returns.
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MITTELSTAEDT, H. FRED, and JOHN C. OLSEN. "An empirical analysis of the investment performance of the Chilean pension system." Journal of Pension Economics and Finance 2, no. 1 (March 2003): 7–24. http://dx.doi.org/10.1017/s1474747202001208.
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The Chilean national pension system is often viewed as the model for moving from a pay-as-you-go system to a prefunded, individual account system. One measure of its success has been its 12% average real rate of return. This study uses monthly return data to examine the source of these returns and to compare the risk-adjusted returns of the pension system to those of Chilean stock indices, debt instruments, and mutual funds. Tests using the Sharpe ratio and the multi-factor Jensen alpha suggest that the pension returns are consistent with the overall riskiness of the Chilean economy. Based on our findings, neither the structure of the Chilean pension system nor the performance of the fund managers should permit the system to earn abnormally high returns in the future.
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Vanita Tripathi and Varun Bhandari. "Performance of Socially Responsible Portfolios Across Sectors in Indian Stock Market." Think India 19, no. 1 (January 13, 2016): 01–09. http://dx.doi.org/10.26643/think-india.v19i1.7787.
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The question of whether socially responsible stocks outperform or under-perform general stocks has been of keen interest for various researchers and academicians. This paper seeks to empirically examine the performance of socially responsible portfolios across various sectors and index of socially responsible and general companies in Indian stock market. We have taken up S&P ESG and CNX NIFTY as the indices of socially responsible and general companies respectively. ESG index has been classified into six different sectors on the basis of GICS. Performance has been evaluated in terms of risk, return and various risk-adjusted measures like Sharpe ratio, Treynor ratio, Double Sharpe ratio, Modified Sharpe ratio, M2 measure, Jensens alpha, Famas decomposition measure, etc. We have also checked whether market model is sufficient to explain cross sectional variation in stock returns or we need Fama-French three factor model. The study period ranges from January 1996 – December 2013 and it is further divided into different sub-periods. We find that socially responsible stocks across IT, FMCG and financial sectors are well rewarding in Indian stock market by generating significantly higher returns and outperforming the two indices on the basis of risk-adjusted measures employed during 18 year period and different sub-periods. The results uphold even with the use of market model and Fama-French three factor model by generating highest significant excess returns. There is no empirical evidence on the performance evaluation of socially responsible portfolios across different sectors. Hence this study is first of its kind. This will help investors in selecting best sector for investment in socially responsible companies. Significant higher returns of ESG index and socially responsible stocks across different sectors make Socially Responsible Investing (SRI) a better investment vehicle for investors in India. This is the time when general companies should change their approach and agenda towards CSR and start considering ESG issues as their investment themes. The regulators, policy makers and mutual funds should come up with different socially responsible products and sectoral indices to initiate the movement of SRI across different sectors in India.
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Vanita Tripathi and Varun Bhandari. "Do Ethical Funds Underperform Conventional Funds? - Empirical Evidence from India." Think India 18, no. 3 (November 15, 2015): 10–19. http://dx.doi.org/10.26643/think-india.v18i3.7792.
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One of the significant developments in the investing community is the rise of socially responsible or ethical investments during last two decades. Because of the increasing size and importance of ethical mutual funds, this paper seeks to evaluate and compare the performance of ethical mutual funds with general funds and benchmark index (S&P BSE Shariah 500 Equity Index) in the Indian market. The sample comprises six ethical fund schemes and three general fund schemes of Tauras mutual fund over the period 2009-2014 using weekly NAVs. The study uses return, risk, risk-adjusted measures (Sharpe ratio, Treynor ratio, Jensens alpha and information ratio), Famas decomposition measure, paired samples t-test, and growth regression equation to accomplish the objectives. The findings suggest that some of the ethical funds generated significantly higher return than other funds and benchmark index. Despite having higher risk, ethical funds outperformed other funds and benchmark index on the basis of various risk-adjusted measures and net selectivity returns. This indicates that the compromise made with respect to diversification by investing in ethical funds was well rewarded in terms of higher returns in Indian context. Our findings lend support to the case of ethical investing in India. Mutual funds and other investment funds should launch schemes which invest in socially responsible or ethical stocks.
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Prado-Dominguez, Javier, and Carlos Fernández-Herráiz. "A Sharpe-ratio-based measure for currencies." European Journal of Government and Economics 4, no. 1 (June 29, 2015): 67. http://dx.doi.org/10.17979/ejge.2015.4.1.4307.
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The Sharpe Ratio offers an excellent summary of the excess return required per unit of risk invested. This work presents an adaptation of the ex-ante Sharpe Ratio for currencies where we consider a random walk approach for the currency behavior and implied volatility as a proxy for market expectations of future realized volatility. The outcome of the proposed measure seems to gauge some information on the expected required return attached to the “peso problem”.
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Narsoo, Jason. "Performance Analysis of Portfolio Optimisation Strategies: Evidence from the Exchange Market." International Journal of Economics and Finance 9, no. 6 (May 15, 2017): 124. http://dx.doi.org/10.5539/ijef.v9n6p124.
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Portfolio allocation is embedded in many decisional tasks for ensuring best returns under the constraint of minimising risk. In this paper, we implement several strategies in order to generate a holistic assessment of portfolio evaluation. The study analyses the performance of an extended framework of the classical tangency and targeted portfolio strategies. The extension is essentially the use of the skewed student-t distribution for the individual assets’ log-return. Our investigation is based on 15 currencies with US dollar as the base currency for the period spanning from 1999 to 2015. A comparative performance analysis between the portfolio optimization strategies is undertaken on the basis of various performance measures, namely the portfolio expected return, standard deviation, Beta coefficient, Sharpe Ratio, Jensen’s Alpha, Treynor ratio and Roy ratio. The portfolio VaR being perceived as one of the core metrics for risk management is also computed. It is actually proxied by 5 VaR estimates - the parametric Gaussian, the equally-weighted historical VaR, the bootstrapping historical VaR, the Monte-Carlo simulation VaR and the parametric GHD VaR. The results show that both tangency portfolios, with the Gaussian or the skewed student-t distribution perform best, particularly on the basis of highest Sharpe reward-to-variability ratio and lowest Value-at-Risk.
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Shao, Shuai, Li-qun Yang, Yuan-biao Zhang, and Zhi-hui Meng. "A Modified Markowitz Multi-Period Dynamic Portfolio Selection Model Based on the LDIW-PSO." International Journal of Economics and Finance 8, no. 1 (December 24, 2015): 90. http://dx.doi.org/10.5539/ijef.v8n1p90.
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<p>Modern financial market is an extremely complicated nonlinear system, while gaming and speculation in the market makes the returns and risks of financial assets a great deal of uncertainty. How to construct an effective portfolio, realize the maximization of portfolio returns and the minimization of risks, and optimize the investment capital allocation efficiency are becoming increasingly a hot topic. This paper discusses a revised Markowitz Multi-period Dynamic portfolio mode by introducing LDIW-PSO in the process of solving the optimal investment weight. The LDIW-PSO has greatly improved the efficiency of searching the optimal weight of the portfolio. In addition, this paper introduces exponential-revised Sharpe ratio (Ex-Sharpe) as the objective function and adopts the optimal variance bound to reflect the real risk preferences of the investors in the financial markets better and modify covariance estimation errors of Mean-Variance model. The empirical study results show that the LDIW-PSO is very suitable for solving the dynamic portfolio model, and the exponential-revised Sharpe ratio can reflect financial market investment situation accurately and avoid covariance errors effectively.</p>
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Chang, C. Edward, Thomas M. Krueger, and H. Doug Witte. "Do ETFs outperform CEFs in fixed income investing?" American Journal of Business 30, no. 4 (October 5, 2015): 231–46. http://dx.doi.org/10.1108/ajb-04-2015-0013.
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Purpose – For a number of reasons ranging from their more recent introduction to their perceived lesser excitement relative to stock-based peers, there have been few studies of fixed income (mainly bond) exchange-traded funds (ETFs). The purpose of this paper is to fill the void by comparing performance measures of fixed income ETFs to fixed income closed-end funds (CEFs). Design/methodology/approach – This paper examines operating characteristics as well as risk and performance measures of all available fixed income ETFs and CEFs in the USA over the last five and ten years ending on December 31, 2014. Operating characteristics include expense ratios, annual turnover rates, tax cost ratios, and tracking error ratios. Performance measures include average annual returns, risks (measured by standard deviations), and risk-adjusted returns (measured by Sharpe ratios and Sortino ratios). Findings – This study finds material and significant difference in a variety of expenses, return measures, and risk measures. Sharpe and Sortino ratio significance is highly dependent on whether net asset values or market values serve as the dependent variable. ETFs would be the preferred choice of fixed income investors who are presumed to be focussing on market-based return measures. Originality/value – This paper empirically compares operating characteristics as well as risk and performance measures of US fixed income ETFs and fixed income CEFs in the same Morningstar categories over the last five and ten years.
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Akinsomi, Omokolade, Katlego Kola, Thembelihle Ndlovu, and Millicent Motloung. "The performance of the Broad Based Black Economic Empowerment compliant listed property firms in South Africa." Journal of Property Investment & Finance 34, no. 1 (February 1, 2016): 3–26. http://dx.doi.org/10.1108/jpif-09-2014-0061.
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Purpose – The purpose of this paper is to examine the impact of Broad-Based Black Economic Empowerment (BBBEE) on the risk and returns of listed and delisted property firms on the Johannesburg Stock Exchange (JSE). The study was investigated to understand the impact of Black Economic Empowerment (BEE) property sector charter and effect of government intervention on property listed markets. Design/methodology/approach – The study examines the performance trends of the listed and delisted property firms on the JSE from January 2006 to January 2012. The data were obtained from McGregor BFA database to compute the risk and return measures of the listed and delisted property firms. The study employs a capital asset pricing model (CAPM) to derive the alpha (outperformance) and beta (risk) to examine the trend amongst the BEE and non-BEE firms, Sharpe ratio was also employed as a measurement of performance. A comparative study is employed to analyse the risks and returns between listed property firms that are BEE compliant and BEE non-compliant. Findings – Results show that there exists differences in returns and risk between BEE-compliant firms and non-BEE-compliant firms. The study shows that BEE-compliant firms have higher returns than non-BEE firms and are less risky than non-BEE firms. By establishing this relationship, this possibly affects the investor’s decision to invest in BEE firms rather than non-BBBEE firms. This study can also assist the government in strategically adjusting the policy. Research limitations/implications – This study employs a CAPM which is a single-factor model. Further study could employ a multi-factor model. Practical implications – The results of this investigation, with the effects of BEE on returns, using annualized returns, the Sharpe ratio and alpha (outperformance), results show that BEE firms perform better than non-BEE firms. These results pose several implications for investors particularly when structuring their portfolios, further study would need to examine the role of BEE on stock returns in line with other factors that affect stock returns. The results in this study have several implications for government agencies, there may be the need to monitor the effect of the BEE policies on firm returns and re-calibrate policies accordingly. Originality/value – This study investigates the performance of listed property firms on the JSE which are BEE compliant. This is the first study to investigate listed property firms which are BEE compliant.
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Gurrib, Ikhlaas, and Elgilani Elshareif. "Optimizing the Performance of the Fractal Adaptive Moving Average Strategy: The Case of EUR/USD." International Journal of Economics and Finance 8, no. 2 (January 24, 2016): 171. http://dx.doi.org/10.5539/ijef.v8n2p171.
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Most technical analysis tools focus traditionally on the simple and exponential moving average technique. This study looks at the performance of an optimized fractal adaptive moving average strategy over different frequency intervals, where the Euro/US Dollar currency pair is analyzed due to the increased correlation between the Euro Index and EUR/USD, and the Dollar Index and EUR/USD over the last year compared to the last 15 years. The optimized strategy is evaluated against a buy-and-hold strategy over the 2000- 2015 period, using annualized returns, annualized risk and Sharpe performance measure. Due to the existence of different number of long and short trades in every trading scenario, this paper proposes the use of a new measure called the Sharpe/Total trades ratio which takes into account the number of trades when evaluating the different trading strategies. Findings strongly support the use of the adaptive fractal moving average model over the naïve buy-and-hold strategy where the former yielded higher annualized returns, lower annualized risk, a higher Sharpe value, although it was subject to more trades than the buy-and-hold strategy. The best market timing strategy occurred when using 131 daily fractal data with a Sharpe/Total trades ratio of 0.31%.
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Barroso, Pedro, and Pedro Santa-Clara. "Beyond the Carry Trade: Optimal Currency Portfolios." Journal of Financial and Quantitative Analysis 50, no. 5 (October 2015): 1037–56. http://dx.doi.org/10.1017/s0022109015000460.
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AbstractWe test the relevance of technical and fundamental variables in forming currency portfolios. Carry, momentum, and value reversal all contribute to portfolio performance, whereas the real exchange rate and the current account do not. The resulting optimal portfolio produces out-of-sample returns that are not explained by risk and are valuable to diversified investors holding stocks and bonds. Exposure to currencies increases the Sharpe ratio of diversified portfolios by 0.5 on average, while reducing crash risk. We argue that besides risk, currency returns reflect the scarcity of speculative capital.
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Darsyah, Rahmawan, Hari Sukarno, and Elok Sri Utami. "LQ45 Share Return Determinants In Indonesia." International Journal of Scientific Research and Management 8, no. 12 (December 20, 2020): 2049–57. http://dx.doi.org/10.18535/ijsrm/v7i12.em05.
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Return is the result obtained from investment. Returns can be in the form of realized returns that have occurred or expected returns that have not occurred but are expected to occur in the future. Return realization (realized return) is the return that has occurred. Realized return is calculated based on historical data. Return realization is important because it is used as a measure of the company's performance. This return history is also useful as a basis for determining the expected return and risk in the future. Expected return is the return expected by investors in the future. In contrast to realized returns which have already occurred, expected returns have not yet occurred. The performance measurement was also carried out at the LQ45 company. In general, this study aims to synthesize whether the current ratio, equity ratio, dividend payout ratio, dividend yield, earnings per share, price book value, return on assets and total asset turnover are partially determinants of stock return variability. The population in this study were non-banking companies included in the LQ45 according to a circular number: Peng-00028 / BEI.OPP / 01-2018 dated January 25, 2018. Non-bank companies were chosen because the types of products produced were not in the form of services. Hypothesis testing uses multiple linear regression analysis test tools. After analyzing the data, several conclusions can be drawn, namely: only the current ratio, equity ratio, dividend payout ratio, dividend yield, return on assets and total asset turnover partially determine stock returns
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Çamlibel, Mehmet Emre, Levent Sümer, and Ali Hepşen. "RISK-RETURN PERFORMANCES OF REAL ESTATE INVESTMENT FUNDS IN TURKEY INCLUDING THE COVID-19 PERIOD." International Journal of Strategic Property Management 25, no. 4 (May 25, 2021): 267–77. http://dx.doi.org/10.3846/ijspm.2021.14957.
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The purpose of this research is to give an insight into the Turkish real estate investment funds (T-REIFs) by comparing their risk-return performances with the main benchmark investment tool Istanbul Stock Exchange-100 (BIST-100) Index. This study evaluated the performance of T-REIFs in four different periods between January 2017 and December 2020 (2017m1–2017m12, 2018m1–2018m12, 2019m1–2019m12 and 2020m1–2020m12) including the Coronavirus Disease (Covid-19) period by applying the Sharpe and Treynor ratios. In a well-diversified portfolio both ratios give the same results, but in the presence of non-systematic risk and the portfolio is poorly diversified, the Treynor ratio is a better indicator than the Sharpe ratio. The findings of this study show that rankings of Sharpe and Treynor ratios may differ for each period. These results also support the fact that the portfolios of funds in the Turkish real estate market are not well diversified. By providing corporate tax exemptions, and by enabling the investors to diversify their investments and reduce their risks, real estate investment funds are important alternatives to direct real estate investments in Turkey. In that context, being one of the pioneer studies in this niche and a new topic in emerging markets, analyzing the return performances of T-REIFs and comparing them with the returns of the BIST-100 index is aimed to contribute to literature as well as provide insight to investors who may consider investing in the Turkish real estate capital market instruments.
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Dziuba, Pavlo, Olena Pryiatelchuk, and Denys Rusak. "EQUITY MARKETS RISKS AND RETURNS: IMPLICATIONS FOR GLOBAL PORTFOLIO CAPITAL FLOWS DURING PANDEMIC AND CRISIS PERIODS." Baltic Journal of Economic Studies 7, no. 3 (June 25, 2021): 97–108. http://dx.doi.org/10.30525/2256-0742/2021-7-3-97-108.
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The paper is devoted to the study of risk and return tradeoff in the global equity market as well as particular market groups: developed, emerging and frontier markets. Impact of this tradeoff on international equity portfolio liabilities is explored. The study confirms the hypothesis that there are some specific patterns of risk and return tradeoff during crisis periods and periods of markets regular regime that substantially differ from each other and define global portfolio equity flows and liabilities in a specific way. The paper thus carries out its main objective that implies revealing these patterns with respective qualitative features and quantitative markers, specifying their implications for equity portfolio flows to markets of different types. Risks and returns for different market groups and global market as a whole are calculated for the period between 2002 and 2020 using standard methodology of contemporary portfolio theory and MSCI indices monthly values. The data for international equity portfolio liabilities as well as the share of particular market group in the global market are used as dependent variables. The latter are regressed by calculated risks and returns. Using the model results and some analytical developments, two patterns of risk/return tradeoff are discovered. The pattern attributable to regular market regimes is characterized by positive returns which is 1.51 % in average for the global market, 1.48 % for developed markets and 2.03 % for emerging markets. Risks in regular pattern are relatively small or moderate at the average level of 3.05 for the global market and are all below the median (3.48). Respective risks for developed and emerging markets are 3.02 and 4.54. The Sharpe ratios in regular pattern are positive at the average level of 0.60 for the global market, 0.57 and 0.45 for developed and emerging market groups respectively. The crisis pattern implies negative returns at the mean of -1.04 for the global market, -0.97 for the developed group and -1.35 for the emerging markets. High risks are all above the median and in average compile 5.5 for the global market, 5.47 for the developed markets and 6.68 for the emerging group. Sharpe ratios for this pattern are negative being equal to -0.19 in the mean. The average value is -0.18 for developed markets and it is -0.24 for emerging markets. Specific pattern of 2020 crisis should be settled out. Its main feature that substantially distinguishes it from other crises is the combination of highest risk level and the positive returns at the same time. Elaborated regression model confirms the direct impact of return and indirect impact of risk on global portfolio liabilities. The influence of risk for regular and crisis patterns does not differ substantially while the impact of return is much stronger during periods of increased volatility (respective model parameters are 3793.76 and 447.24). However, the discovered impact is much more reliable in crisis pattern that is supported by much higher determination ratio. Developed markets experience similar effects.
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Biasin, Massimo, Roy Cerqueti, Emanuela Giacomini, Nicoletta Marinelli, Anna Grazia Quaranta, and Luca Riccetti. "Macro Asset Allocation with Social Impact Investments." Sustainability 11, no. 11 (June 4, 2019): 3140. http://dx.doi.org/10.3390/su11113140.
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Using a unique dataset of 50 listed companies that meet the majority of the OECD requirements for social impact investments, we construct a social impact finance stock index and investigate how investing in social impact firms can contribute to portfolio risk-return performance. We build portfolios with three different methodologies (naïve, Markowitz mean-variance optimization, GARCH-copula model), and we study the performance in terms of returns, Sharpe ratio, utility, and forecast premium based on a constant relative risk aversion function for investors with different levels of risk aversion. Consistent with the idea that social impact investment can improve portfolio risk-return performance, the results of our macro asset allocation analysis show the importance of a large fraction of investor portfolios’ stake committed to social impact investments.
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Kiymaz, Halil. "A performance evaluation of Chinese mutual funds." International Journal of Emerging Markets 10, no. 4 (September 21, 2015): 820–36. http://dx.doi.org/10.1108/ijoem-09-2014-0136.
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Purpose – The purpose of this paper is to examine the performance of Chinese mutual funds during the period of January 2000 to July 2013. Emerging market funds provide investors with alternative risk exposure for their portfolios. The Chinese market has developed rapidly and differs from developed markets regarding wide range of market and economic characteristics, including size, liquidity, and regulation. The performance of these funds is investigated by using various risk adjusted measures. The study also compares performances of mutual fund subgroups and explains the factors influencing their performances. Design/methodology/approach – This is an empirical paper using various risk performance measures. These measures include the Sharpe ratio, Information ratio, Treynor ratio, M-squared and Jensen’s α. The data comprises 1,037 funds. These funds are further divided into ten subgroup of funds based on their classification: equity (484); aggressive allocation (95 funds); conservative allocation (18 funds); moderate allocation (85 funds); aggressive bond (92 funds); normal bond (52 funds); guaranteed (29 funds); money market (53 funds); and QDII funds (119 funds). A cross-sectional analysis of fund performance is performed using Sharpe and Jensen’s measures as dependent variables and fund-specific variables (Age, Turnover, Tenure, Frontload, Redemption fees, and Management fees), market-specific variables (P/E ratio, P/B ratio, Market capitalization), and fund types as independent variables. Findings – The findings show that Chinese funds generate positive αs for their investors. The highest return is provided with aggressive allocation funds followed by moderately aggressive allocation funds. The average Jensen’s α is the highest in aggressive allocation funds. QDII funds do not provide significant positive αs; in several instances αs are negative. Further analysis of sub-periods show that Chinese funds do not consistently provide excess returns and show great variations. The study also finds that older funds, funds with higher fees, high price to book ratio, and smaller funds continue to perform better than other funds. Originality/value – This study adds value by focussing on Chinese funds and risk/return characteristics of these funds. The research will further explore factors explaining these returns.
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Wirawan, Ganda Hengky, and Erman Sumirat. "Performance Analysis of Investment Portfolio Strategy Using Warren Buffett, Benjamin Graham, and Peter Lynch Method in Indonesia Stock Exchange." European Journal of Business and Management Research 6, no. 4 (August 31, 2021): 394–401. http://dx.doi.org/10.24018/ejbmr.2021.6.4.1040.
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Warren Buffett, Benjamin Graham, and Peter Lynch are three (3) famous investors’ gurus in the world that have already proved that they can outperform the market by value investing method. Method that they are using are based on fundamental analysis and they screen the company’s stock based on several key financial ratios and criteria that they found important in analyzing the company. In this project, Author conducted research and study to find out the applicability of the screening method made by the gurus in Indonesia Stock Exchange (IDX) using equally weighted method, back testing it in May 2012 until December 2020 periods, and evaluate the performance of each type of portfolios made using Sharpe ratio, Treynor ratio, and Jensen’s alpha. The result of this project is all type of these portfolios are having positive risk adjusted returns. Peter Lynch type of portfolio is having the highest annualized return 24.04 % or 613 % cumulative return, while Warren Buffett and Benjamin Graham are having annualized returns 9.42 % (or cumulative return 216.48%) and 8.3 % (or cumulative return 198.27%) respectively. Moreover, Author found that those three types of portfolios are having beta (β) nearly the same with one (1) means that the portfolios are having same risk with its systematic (market) risk.
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Rifqi, Muhammad. "The Cost of Sharia Investing: Comparative Empirical Study in Indonesian Stock Market." Journal of Emerging Economies and Islamic Research 4, no. 1 (January 31, 2016): 33. http://dx.doi.org/10.24191/jeeir.v4i1.9077.
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This study attempts to investigate the financial performance of Jakarta Islamic Index (JII) in comparison with more widely known Jakarta Composite Index (JCI). Using historical data from January 2004 to May 2015, we comprehensively measure returns and risk properties of the indices using mean returns, standard deviation, Sharpe ratio, Treynor ratio, Jensen Alpha, and Value-at-Risk, and evaluate their results. We also perform portfolio simulation to assess the diversification capability of JII from strategic asset allocation perspective. Our findings indicate that despite JII outperforms JCI during pre-crisis in terms of raw and risk-adjusted returns, it underperforms JCI in all other sub-periods. Meanwhile, in terms of risk characteristics, we find that JII is a clear inferior to JCI. Thus, in overall we argue that there is a substantial cost associated with Sharia investing in Indonesian Stock Market. Nevertheless, simulation results indicate that JII could serve as a valuable portfolio diversification tool, in which it succeeds in lowering the risk of the whole portfolio.
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Kiymaz, Halil. "Factors influencing SRI fund performance." Journal of Capital Markets Studies 3, no. 1 (July 8, 2019): 68–81. http://dx.doi.org/10.1108/jcms-04-2019-0016.
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Purpose The purpose of this paper is to examine socially responsible investment (SRI) fund performance and investigate the factors influencing fund performance. Design/methodology/approach The study uses return data from the Morningstar database for 152 SRI funds from January 1995 to May 2015. The initial analysis includes the use of various risk-adjusted performance measures, including Sharpe ratio, Treynor ratio, Information ratio, Sortino ratio and M2. The study also uses four factor models, including Jensen single-factor model, Fama–French three-factor model, Carhart four-factor model and Fama–French five-factor model to explain SRI fund returns. Finally, a cross-sectional regression analysis is applied to investigate the determinants of SRI fund returns. Findings The results show that, on average, the SRI funds provide comparable risk-adjusted returns relative to various benchmark market indices. Market factor is significant in explaining SRI fund returns. Examining each factor model, the results do not support Fama–French’s three-factor model as neither size nor value factor is significant. The author finds weak support for Carhart’s momentum factor along with the market factor. Finally, the Fama–French five-factor model shows market, size and operating profit factors explain SRI fund returns. The study also finds the fund performance is stronger for funds with the higher turnover ratio, the larger fund size and more managerial experience and lower for funds with higher expense ratio. Also, funds formed with negative screening perform better than positive or mixed screened funds. Originality/value SRI funds have received considerable attention from investors. This study contributes to the literature by examining SRI fund performance and investigating factors influencing their performance using multiple factor models and cross-sectional regression analysis. The findings are relevant for investors who demand responsible investment opportunities without sacrificing returns for nonfinancial screenings. Findings also suggest that investors should consider fund characteristics when selecting SRI funds.
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Le Saout, Erwan. "Performance of the Microfinance Investment Vehicles." Applied Economics and Finance 4, no. 6 (October 23, 2017): 42. http://dx.doi.org/10.11114/aef.v4i6.2719.
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Over the last few years, the microfinance sector has seen its transformation. Microfinance institutions seek a wide range of sources of funding, while private investors seek not only social returns but also financial returns. This new approach has led to the emergence of microfinance investment funds and initial public offerings of certain Microfinance institutions. Microfinance now seems to be seen as a new investment opportunity by global investors.Aim of this paper is to study the performance of public Microfinance Investment Vehicles. Despite a significant currency risk, we find that the integration of microfinance assets diversifies the investor’s risks and improves the efficient frontier. We conclude that microfinance institutions, via investment vehicles, are likely to attract capital from socially responsible investors seeking new investment opportunities despite a sharp decline in the Sharpe ratio over the past few months.
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Boldrin, Michele, Lawrence J. Christiano, and Jonas D. M. Fisher. "Habit Persistence, Asset Returns, and the Business Cycle." American Economic Review 91, no. 1 (March 1, 2001): 149–66. http://dx.doi.org/10.1257/aer.91.1.149.
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Two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity. In addition, its business-cycle implications represent a substantial improvement over the standard model. It accounts for persistence in output, comovement of employment across different sectors over the business cycle, the evidence of “excess sensitivity” of consumption growth to output growth, and the “inverted leading-indicator property of interest rates,” that interest rates are negatively correlated with future output. (JEL D10, E10, E20, G12)
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FAIAS, JOSÉ AFONSO, and TIAGO CASTEL-BRANCO. "OUT-OF-SAMPLE STOCK RETURN PREDICTION USING HIGHER-ORDER MOMENTS." International Journal of Theoretical and Applied Finance 21, no. 06 (September 2018): 1850043. http://dx.doi.org/10.1142/s0219024918500437.
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We analyze variance, skewness and kurtosis risk premia and their option-implied and realized components as predictors of excess market returns and of the cross-section of stock returns. We find that the variance risk premium is the only moment-based variable to predict S&P 500 index excess returns, with a monthly out-of-sample [Formula: see text] above 6% for the period between 2001 and 2014. Nonetheless, all aggregate moment-based variables are effective in predicting the cross-section of stock returns. Self-financed portfolios long on the stocks least exposed to the aggregate moment-based variable and short on the stocks most exposed to it achieve positive and significant Carhart 4-factor alphas and a considerably higher Sharpe ratio than the S&P 500 index, with positive skewness.
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Park, Seyoung, Eun Ryung Lee, Sungchul Lee, and Geonwoo Kim. "Dantzig Type Optimization Method with Applications to Portfolio Selection." Sustainability 11, no. 11 (June 10, 2019): 3216. http://dx.doi.org/10.3390/su11113216.
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This paper investigates a novel optimization problem motivated by sparse, sustainable and stable portfolio selection. The existing benchmark portfolio via the Dantzig type optimization is used to construct a sparse, sustainable and stable portfolio. Based on the formulations, this paper proposes two portfolio selection methods, west and north portfolio selection, and investigates their empirical properties. Numerical results presented for 12 datasets and various simulated data show that the west selection can reduce risk, and the north selection may outperform the benchmark as to risk-adjusted returns (based on, e.g., information ratio and Sharpe ratio).
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Yang, Yurun, Ahmet Goncu, and Athanasios Pantelous. "Pairs trading with commodity futures: evidence from the Chinese market." China Finance Review International 7, no. 3 (August 21, 2017): 274–94. http://dx.doi.org/10.1108/cfri-09-2016-0109.
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Purpose The purpose of this paper is to compare the profitability of different pairs selection and spread trading methods using the complete data set of commodity futures from Dalian Commodity Exchange, Shanghai Futures Exchange and Zhengzhou Commodity Exchange. Design/methodology/approach Paris trading methods that are proposed in the literature are compared in terms of the risk-adjusted returns visa in-sample and out-of-sample backtesting and bootstrapping for robustness. Findings The empirical results show that pairs trading in the Chinese commodity futures market offers high returns, whereas, the profitability of these strategies primarily depends on the identification of suitable pairs. The observed high returns are a compensation for the spread divergence risk during the potentially longer holding periods, which implies that the maximum drawdown is more crucial compared to other risk-adjusted return measures such as the Sharpe ratio. Originality/value Complementary to the existing literature, for the Chinese commodity futures market, it is shown that if shorter maximum holding periods are introduced for the spread positions, then the pairs trading profits decreases. Therefore, the returns do not necessarily imply market inefficiency when the higher maximum drawdown associated with the holding period of the spread position is taken into account.
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DeMiguel, Victor, Yuliya Plyakha, Raman Uppal, and Grigory Vilkov. "Improving Portfolio Selection Using Option-Implied Volatility and Skewness." Journal of Financial and Quantitative Analysis 48, no. 6 (December 2013): 1813–45. http://dx.doi.org/10.1017/s0022109013000616.
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AbstractOur objective in this paper is to examine whether one can use option-implied information to improve the selection of mean-variance portfolios with a large number of stocks, and to document which aspects of option-implied information are most useful to improve their out-of-sample performance. Portfolio performance is measured in terms of volatility, Sharpe ratio, and turnover. Our empirical evidence shows that using option-implied volatility helps to reduce portfolio volatility. Using option-implied correlation does not improve any of the metrics. Using option-implied volatility, risk premium, and skewness to adjust expected returns leads to a substantial improvement in the Sharpe ratio, even after prohibiting short sales and accounting for transaction costs.
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Vortelinos, Dimitrios, and Konstantinos Gkillas. "The effect of the european economic news releases to the US financial markets in the crisis period." Investment Management and Financial Innovations 13, no. 4 (December 15, 2016): 33–57. http://dx.doi.org/10.21511/imfi.13(4).2016.04.
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This paper evaluates the effect of all European economic news releases on the US financial markets for the main crisis period from June 2007 up to October 2011. Evaluation concerns Sharpe ratios, as well as magnitude and frequency of volatility jumps for the periods before and after a news release. Sharpe ratios are examined with the risk of the excess returns being estimated by the flat-top Bartlett kernel estimator of Barndorff-Nielsen et al. (2008) with an optimal (in a finite sample) choice for the number of autocovariances, as suggested by Bandi and Russell (2011). Volatility jumps are detected according to the jump detection scheme of Ait-Sahalia and Jacod (2009). Keywords: European economic news releases,crisis; macroeconomic variables, Sharpe ratio,jumps. JEL Classification: G01, G15
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Qudratullah, Mohammad Farhan. "Zakah Rate In Islamic Stock Performance Models: Evidence From Indonesia." IQTISHADIA 13, no. 1 (June 15, 2020): 107. http://dx.doi.org/10.21043/iqtishadia.v13i1.6004.
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<p>There are three models commonly used to measure the performance of Islamicstocks, named Treynor Ratio, Sharpe Ratio, and Jansen Index. One component of the three models is risk-free returns which are usually approached with interest rates, whereas interest rates are prohibited in the concept of Islamic finance. This paper will approach a risk-free return with zakat-rate on the Islamic capital market in Indonesia from January 2011 - July 2018, then compare it with a model that uses interest rates. The results obtained by the model with interest rates and zakah-rate in this third model have very high suitability values, so that zakah-rate can be used as an alternative substitute for interest rates in measuring the Islamic stock performance. Beside not contradicting the concept of Islamic economics, calculation of models with zakah-rate is simpler than models with interest rates.</p>
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Puri, Himanshu. "Performance Evaluation Of Balanced Mutual Fund Schemes In Indian Scenario." Paradigm 14, no. 2 (July 2010): 20–28. http://dx.doi.org/10.1177/0971890720100204.
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Indian Investors are risk averse and thus they prefer to invest in safe securities giving them decent returns. There are lots of investment alternatives available to them. But according to past experience, Mutual Fund Industry is having the safest image. Number of investors investing in this industry is rising day-by-day, so it becomes important for them as well as fund houses to know the performance of their mutual funds. In this paper, an attempt has been made to study the performance of selected balanced schemes of mutual funds based on risk-return relationship models and various measures. Balanced schemes of mutual funds are the ones which are mostly preferred by Indian investors because of their balanced portfolio in equity and debt. A total of 30 schemes offered by various mutual funds have been studied over the time period September 2007 to August 2010 (3 years). The analysis has been made on the basis of mean return, beta risk, total risk, Sharpe ratio, Treynor ratio and Jensen Alpha. The overall analysis finds HDFC (Growth) Mutual fund being the best performer and JM Financial (Dividend) Mutual fund showing poor below-average performance when measured against the risk-return relationship models.
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Liu, Ying, Marie Rekkas, and Augustine Wong. "Inference for the Sharpe Ratio Using a Likelihood-Based Approach." Journal of Probability and Statistics 2012 (2012): 1–24. http://dx.doi.org/10.1155/2012/878561.
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The Sharpe ratio is the prominent risk-adjusted performance measure used by practitioners. Statistical testing of this ratio using its asymptotic distribution has lagged behind its use. In this paper, highly accurate likelihood analysis is applied for inference on the Sharpe ratio. Both the one- and two-sample problems are considered. The methodology hasO(n−3/2)distributional accuracy and can be implemented using any parametric return distribution structure. Simulations are provided to demonstrate the method's superior accuracy over existing methods used for testing in the literature.
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Devaney, Michael, Thibaut Morillon, and William Weber. "Mutual fund efficiency and tradeoffs in the production of risk and return." Managerial Finance 42, no. 3 (March 14, 2016): 225–43. http://dx.doi.org/10.1108/mf-05-2015-0142.
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Purpose – The purpose of this paper is to estimate the performance of 188 mutual funds relative to the risk/return frontier accounting for the transaction costs of producing a portfolio of investments. Design/methodology/approach – The directional output distance function is used to estimate mutual fund performance. The method allows the data to define a frontier of return and risk accounting for the transaction costs associated with securities management and production of risky returns. Proxies for the transaction costs of producing a portfolio of securities include the turnover ratio, load, expense ratio, and net asset value. The estimates of mutual fund performance are bootstrapped to account for the unknown data generating process. By comparing each mutual fund’s performance relative to the capital market line the authors determine how the fund should adjust their portfolio in regard to risk and return in order to maximize the inefficiency adjusted Sharpe ratio. Findings – The bootstrapped estimates indicate that the average mutual fund could simultaneously expand return and contract risk by 3.2 percent if it were to operate on the efficient frontier. After projecting each mutual fund’s return and risk to the efficient frontier the authors find that a majority of the mutual funds should reduce risk to be consistent with the capital market line. Originality/value – Many researchers have used data envelopment analysis to estimate a piecewise linear frontier of risk and return to measure mutual fund performance. To the authors’ knowledge the research is the first to use a twice-differentiable quadratic directional distance function to measure the managerial performance and risk/return tradeoff of mutual funds.
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Faias, José Afonso, and Pedro Santa-Clara. "Optimal Option Portfolio Strategies: Deepening the Puzzle of Index Option Mispricing." Journal of Financial and Quantitative Analysis 52, no. 1 (February 2017): 277–303. http://dx.doi.org/10.1017/s0022109016000831.
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Traditional methods of asset allocation (such as mean–variance optimization) are not adequate for option portfolios because the distribution of returns is non-normal and the short sample of option returns available makes it difficult to estimate their distribution. We propose a method to optimize a portfolio of European options, held to maturity, with a myopic objective function that overcomes these limitations. In an out-of-sample exercise incorporating realistic transaction costs, the portfolio strategy delivers a Sharpe ratio of 0.82 with positive skewness. This performance is mostly obtained by exploiting mispricing between options and not by loading on jump or volatility risk premia.
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Kupčík, Petr, and Pavel Gottwald. "The Return-risk Performance of Selected Pension Fund in OECD with Focus on the Czech Pension System." Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis 64, no. 6 (2016): 1981–88. http://dx.doi.org/10.11118/actaun201664061981.
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This paper focuses on the measuring and comparing investment performance of pension funds in selected European countries. Comparison of the investment performance of pension funds is determined by means of the Sharpe ratio and the Sortino ratio. We used data of nominal appreciation of pension funds from the Czech Republic, Slovakia, Poland, Sweden, Switzerland and the Netherlands in the period 2005−2013. These countries were selected because they have many common features but Sweden, Switzerland and the Netherlands were added to the analysis because we wanted to show the differences between a developed and less developed fully funded system. The last part of this article presents the main causes of the differences in investment performance of pension funds. Conclusions of the paper are focused on a comparison of the results of the Sharpe ratio and the Sortino ratio of pension funds from selected countries and recommendations for the Czech pension system. The article proposes a mechanism for determining the order of the negative Sharpe ratio and the Sortino ratio.
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Chevallier, Julien, and Dinh-Tri Vo. "Portfolio allocation across variance risk premia." Journal of Risk Finance 20, no. 5 (November 18, 2019): 556–93. http://dx.doi.org/10.1108/jrf-06-2019-0107.
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Purpose In asset management, what if clients want to purchase protection from risk factors, under the form of variance risk premia. This paper aims to address this topic by developing a portfolio optimization framework based on the criterion of the minimum variance risk premium (VRP) for any investor selecting stocks with an expected target return while minimizing the risk aversion associated to the portfolio according to “good” and “bad” times. Design/methodology/approach To accomplish this portfolio selection problem, the authors compute variance risk-premium as the difference from high-frequencies' realized volatility and options' implied volatility stemming from 19 stock markets, estimate a 2-state Markov-switching model on the variance risk-premia and optimize variance risk-premia portfolios across non-overlapping regions. The period goes from March 16, 2011, to March 28, 2018. Findings The authors find that optimized portfolios based on variance-covariance matrices stemming from VRP do not consistently outperform the benchmark based on daily returns. Several robustness checks are investigated by minimizing historical, realized or implicit variances, with/without regime switching. In a boundary case, accounting for the realized variance risk factor in portfolio decisions can be seen as a promising alternative from a portfolio performance perspective. Practical implications As a new management “style”, the realized volatility approach can, therefore, bring incremental value to construct the conditional covariance matrix estimates. Originality/value The authors assess the portfolio performance determined by the variance-covariance matrices that are derived by four models: “naive” (Markowitz returns benchmark), non-switching VRP, maximum likelihood regime-switching VRP and Bayesian regime switching VRP. The authors examine the best return-risk combination through the calculation of the Sharpe ratio. They also assess another different portfolio strategy: the risk parity approach.
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Singh, Jaspal, and Kiranpreet Kaur. "Testing Ben Graham’s Stock Selection Criteria in Indian Stock Market." Management and Labour Studies 39, no. 1 (February 2014): 43–62. http://dx.doi.org/10.1177/0258042x14535156.
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Using the data on stocks listed on Bombay Stock Exchange for the period spanning from 1996 to 2010, the present study intends to examine the profitability of stock selection criteria of Benjamin Graham in Indian capital market. The different risk–reward combinations of the criteria and the minimum number of principles to be followed by a stock have been examined using one sample T-test, Sharpe ratio and capital asset pricing model (CAPM). The results make it evident that all the risk-reward combinations can be used safely by investors in order to extract excess returns except the combination of discount to net current asset value (NCAV) and current ratio and the combination of high dividend yield and low leverage. Such stocks have lesser chances of growth in future and excessively blocked inventory reduces the operating efficiency of the business. Furthermore the stocks meeting any four rules of the criteria can yield excess returns to investors if such stocks are held for the period of 24 months.