Practical Risk-Adjusted Performance Measurement by Carl R. Bacon

Author:Carl R. Bacon
Language: eng
Format: epub, pdf
ISBN: 9781118391525
Publisher: Wiley
Published: 2012-09-18T16:00:00+00:00

Prospect ratio

Watanabe notes that people have a tendency to feel loss more than gain, a well-known phenomenon described by Prospect Theory.11 Watanabe suggests utilising a Sharpe type ratio that penalises losses more than it rewards gains as shown below. This ratio is based on Watanabe's empirical research which suggests investors dislike losses two and a quarter times as much as they enjoy gains. Users might wish to select their own preferences.

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1 W.F. Shadwick and C. Keating (2002) A Universal Performance Measure. Journal of Performance Measurement (Spring), 59–84.

2 A. Bernardo and O. Ledoit (1996) Gain, Loss and Asset Pricing.

3 S. Lavinio (1999) The Hedge Fund Handbook. McGraw-Hill.

4 F. Sortino and R. van der Meer (1991) Downside Risk. Journal of Portfolio Management (Summer).

5 J.S. Ang and J.H. Chua (1979) Composite Measures for the Evaluation of Investment Performance. Journal of Financial and Quantitative Analysis, 361–384.

6 W.T. Ziemba (2005) The Symmetric Downside-Risk Sharpe Ratio. Journal of Portfolio Management 32 (1), 108–122.

7 P.D. Kaplan and J.A. Knowles (2004) Kappa: A Generalized Downside Risk-Adjusted Performance Measure. Journal of Performance Measurement (Spring), 42–54.

8 F. Sortino, R. van de Meer and A. Plantinga (1999) The Dutch Triangle: A framework to measure upside potential relative to downside risk. Journal of Portfolio Management 26, 50–58.

9 B.M. Rom and K.W. Ferguson (2001) A Software Developer's View: Using Post-Modern Portfolio Theory to Improve Investment Performance Measurement. Chapter 5 in Managing Downside Risk in Financial Markets (F. Sortino and S. Satchell, eds).

10 S. Farinelli and L. Tibiletti (2008) Sharpe Thinking in Asset Ranking with One-Sided Measures. European Journal of Operational Research 185(3), 1542–1547.

11 D. Kahneman and A. Tversky (1979) Prospect Theory: An Analysis of Decision under Risk. Econometrica XLVII, 263–291.

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