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Risk - Adjusted Performance Measures - Coggle Diagram
Risk - Adjusted Performance Measures
Financial managers frequently recommend alternative investing strategies m to their clients in an attempt to maximize the client's risk-adjusted returns.
Typical Investing techniques
Dollar - cost averaging
The value of DCA when investors have target returns and the investment instruments are highly volatile. (Milevsky and Posner 1999)
The DCA investing strategy, the investor deposits one-tweifth of his initial wealth in the risky asset and keeps the remaining wealth in T-bills.
DCA is the most preferred investing strategy for both corporate and government bonds
Value Averaging
Lump Sum
Israelson (1999) concludes that DCA is a superior strategy for funds with low volatility, while lump-sum investing is best for volatile funds.
Sharpe Ratio
The pervasive means of ranking the alternative investing styles is the Sharpe ratio
The Sharpe ratio is the excess return per unit of standard deviation, it has been widely adopted as a performance
The Sharpe ratio frequently leads to reverse rank ordering when compared with the alternative performance measures
The Sharpe ratio, while measuring investors' reward for bearing risk, uses the broadest definition of both reward and of risk.
The Sharpe ratio looks at excess returns over the risk-free rate
The Sharpe ratio uses the standard deviation to meas- ure risk,
Sharpe ratio typically gives conflicting ranking results when com- pared with the upside potential ratio
Sortino Ratio
The Sortino ratio constructs a risk adjusted performance measure by replacing the standard deviation with the downside risk measure.
It suggest that the return should be replaced with the upside potential.
The Sortino ratio
begins to capture investor's concern with risk by replacing the standard deviation of returns with the downside risk as a measure of risk
Continues to use excess returns as the measure of returns.
Is more likely to capture the investor attitude, ranking based on these two ratios is a valid consideration.
UPR (Upside potential ratio)
For a risk/return trade-off to take place, we should consider only the upside potential.
The UPR is a better measure than the Sharjie ratio.
The UPR consistently lead to opposite strategy rankings for the full sample and arc typicall}' inconsistent for sub-samples.
The UPR uses an alternative denominator value to calculate the reward for bearing the down- side risk.
José Fernando García Barranco A01734348