7 votes
Accepted

Risk-adjusted returns ratio that does not reward high risk for negative returns

Yes, you are correct on both terms - it doesn't make much sense, and there exists a well-cited solution by C. Israelsen: "A refinement to the Sharpe ratio and information ratio." Journal of Asset ...
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5 votes
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Sharpe ratio: discrete or continuous returns?

For client reporting purposes, it is customary to use discrete returns. For backtesting, it pretty much make no difference.
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5 votes
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average return Vs cumulative return interpretation

Consider these two simple portfolios: Portfolio 1 returns -10% in month 1 and 10% in month 2. Average arithmetic return is zero, and cumulative return is $(1-10\%)(1+10\%)=0.99$. Portfolio 2 returns -...
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  • 10.9k
5 votes

CAPM and Beta: problem with regression (Beta is too low yet statistically significant?)

You are right to be sceptical of the beta of an international portfolio when it is calculated using daily returns. Beta estimates are often low for international portfolios because stock market ...
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  • 1,356
4 votes

Volatility of monthly performances, where the last month is short

Ideally you'd want to use daily returns and just annualise it, but if you only have monthly returns then calculating the weighted variance in the following way might do it: $$ Var = \frac{\sum_{i=0}^{...
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  • 141
4 votes
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What is an accepted method to calculate percent PnL from a short position?

A short position is a liability on your books, as the borrowed asset has to be returned to the owner. The return is then the percentage return of that liability. Assume that the shorted asset at ...
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  • 959
4 votes
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Sharpe Ratio, risk free rate

No, this is not the same. For example, consider the scenario $$ \begin{align*} r_A &= 10\% \quad\quad \sigma_A = 10\% \\ r_B &= 1.5\% \quad\quad \sigma_B = 1\% \\ \end{align*} $$ If $r_f=1\%$, ...
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  • 741
4 votes

What returns to use?

Since you're looking to summarize the performance of a monthly return series in a single number, it is best to compute the annualized return. This is the standard used in the investment management ...
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  • 61
4 votes
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Alternative relative performance measure to Sharpe ratio for non-IID return

I don't know that there is a "standard-solution crystalized in the community," but there are alternatives. The ones that I prefer are Omega, Sortino, and Kappa. All three of these ratios, unlike ...
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  • 3,770
4 votes

Multi-Period Contribution

Thanks for the example. It is exactly like my comment. Look at your weights after the first period. Are they really 80% and 20%? Lets say you have £100 to invest. £80 is invested in product A. That ...
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  • 4,698
4 votes
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Understanding out-of-sample performance metrics for Realized Volatility

You can compare the losses against each model and determine the "best" model to be the one with the smallest losses. In many cases for larger studies, the results might be ambiguous where ...
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  • 3,733
3 votes
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Calculate Sharpe ratio for only one return

For a single period return, the squared value of that return approximates variance (i.e., the absolute value approximates the standard deviation). Standard deviation is defined thus: $$\sigma_X = \...
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3 votes

What's the exact definition of alpha?

As @Alex C had pointed out, the CAPM and subsequently Jensen were probably the original motivations of the term $\alpha$. Bear in mind that $\alpha$ and $\beta$ are conventional notation for ...
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  • 5,062
3 votes

What's the exact definition of alpha?

In Quant Finance we start with the assumption that (until shown otherwise) no one can outperform a simple, passive benchmark. Such a benchmark might be for example the S&P 500 index leveraged up ...
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  • 9,097
3 votes

Risk-adjusted performance measurement: Log returns vs. simple returns and geometric vs. arithmetic mean return

In theory, stock prices are lognormally distributed. People usually prove lognormality by referring to positivity and right skewness of stock prices. Mathematically (or philosophically if you wish), ...
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3 votes
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How to calculate the Sharpe ratio for market neutral strategies?

There is no universally accepted answer for the main problem here which is the denominator for the return calculation is zero or near zero. There are a few common solutions to this issue. The most ...
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  • 1,551
3 votes

Measuring Behavioral Finance Effects in Fund/Portfolio Manager Analysis

More measurable effects to add to your list: "window dressing" - returns of the fourth quarter or 12th month (i.e. year-end) are higher on average than oher returns; the same to returns of 4th months ...
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3 votes

Measuring alpha (Academia vs the Industry)

Both questions are not as straightforward as @Hui (and most academics and practitioners) would immediately think. I would try to put in my two cents to answering your question 1. Short answer: It ...
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3 votes

Annualising Data

It depends on the ratio you are looking at. Most of them are scaled by $\sqrt{12}$, but the Treynor index is a bit different and is scaled by $12$. Sharpe and Information ratios are both ratios of ...
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  • 1,356
3 votes

Is there a python library to generate performance metrics from returns of the strategy?

Check out empyrical. This library provides methods for calculating several risk and performance metrics. pyfolio is also a great tool for visualizing your portfolio's performance over time.
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3 votes

How likely it is that a strategy profits are explained by luck?

I believe that by "luck" you mean that you want to check if you can attribute the pnl of your strategy to something else than the "alpha" that it's trying to capture. The standard way of doing this ...
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3 votes
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What is a cumulative return series?

O7-30-2021 : POSTING COMMENT AS ANSWER BASED ON SUGGESTION OF RICHARD HARDY. Hi: The cumulative return is defined as the return on 1 dollar if it had been invested in whatever asset the returns came ...
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  • 1,017
3 votes
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Information Coefficient (IC) Formulae Differences

Paraphrasing some quote: "they are different but same but still different" In reality the number of correct bets $N_c$ is the number of times the analyst was correct predicting the ...
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  • 826
3 votes
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Out of Sample Results Decay Rapidly With Prediction Window or Embargo

This is a complex question. Let me reformulate its main components to try to give a generic answer: if a relationship is non-stationary and I capture it via a model, I expect the explanatory power of ...
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2 votes

Market Timing Performance for a single stock

For analyzing a series of trades on a single stock over a period of time. You can understand your market timing contribution by comparing your actual return to the return from consistently holding ...
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  • 1,551
2 votes
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Sortino Ratio calculation

Firstly, I suggest you to use more recognized source to study and compute quantitative finance model or indicators; in such case, for instance, you could take as example the following paper as ...
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  • 2,446
2 votes
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How can I compare two mutual funds' performance with a sparse set of data?

I think the only valid answer is you can't. The techniques you describe would work of the signal was much stronger than the noise but it seems that with your fund returns this is not the case. You ...
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  • 7,662
2 votes

Risk-adjusted returns ratio that does not reward high risk for negative returns

Does this make sense? Consider this: You are an investor. You have 2 investments. 1 high risk (hr) and the other low risk (lr). You expect the hr to be volatile and expect the opposite from lr. ...
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  • 3,770
2 votes

Risk-adjusted returns ratio that does not reward high risk for negative returns

1) In a certain, theoretical sense, it does make sense: suppose two portfolio managers delivered negative returns (-1%, say), and one had a higher volatility ("risk") than the other. Then the ...
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2 votes

Accuracy for GARCH models

The best way to check the accuracy of a Garch model is to use the methodology of Hansen and Lunde (2005). In this paper they actually compared the accuracy of 330 Arch-type models and concluded that ...
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  • 6,810

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