The 101 ways to measure portfolio performance

Philippe Cogneau

Researcher, University of Liège, HEC Management School

Email: philippecogneau@skynet.be

Georges Hübner

Deloitte Professor of Financial Management, University of Liège, HEC Management School

Associate Professor of Finance, Maastricht University, Faculty of Economics and Business Administration

Mailing address: Université de Liège, Rue Louvrex 14, Bat. N1, B-4000 Liège, Belgium.

Phone : (+32) 4 2327428

Email: g.hubner@ulg.ac.be

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 The 101 ways to measure portfolio performance

Abstract

This paper performs a census of the 101 performance measures for portfolios that have been proposed so
far in the scientific literature. We discuss their main strengths and weaknesses and provide a classification
based on their objectives, properties and degree of generalization. The measures are categorized based on
the general way they are computed: asset selection vs. market timing, standardized vs. individualized,
absolute vs. relative and excess return vs. gain measure. We show that several categories have been
exhausted while some others feature very heterogeneous ways to assess performance within the same sets
of objectives.

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 The 101 ways to measure portfolio performance

1. Introduction

Since the introduction of the Sharpe ratio in 1966, many different measures of portfolio performance have

been introduced in the scientific as well as practitioners literature. Yet, there exists no census of all of

them. The most complete study so far is due to Le Sourd [2007], but it mentions about fifty different

measures1.

From an exhaustive review of the relevant literature, we have identified one hundred and one

portfolio performance measures2. The main purpose of this paper is to provide a taxonomy of them. It

naturally involves the identification of categories, in which we gather those measures that display

common characteristics. Hence, we do not only provide an exhaustive list, but also a partition of the

performance measurement area in homogenous categories.3

The second objective of this article is to identify, among the categories, those that can be considered

as “dead-ends” in terms of further investigations. Whenever there exists a performance measure that

provides a proper generalization of any measure within the same category, then common sense dictates

the usage of this particular measure and the abandonment of any other attempt to research further in that

direction.

2. A general typology

Insert exhibit 1 approximately here

Exhibit 1 displays the structure of the simple binary classification tree proposed in this paper.

In the first level, we distinguish the types of skills reflected in the measures, namely asset selection

versus market timing. Measures that reflect asset selection are themselves split according to the

individualization of performance. We segregate the standardized risk-adjusted performance measures

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versus those that explicitly depend on investors’ preferences. Finally, in the category of risk-adjusted

performance measures, all corresponding measures can be classified according to a double entry table.

The first dimension represents the measure of value creation, whether it is an excess return or a gain

potential. The second dimension reports the type of performance translation, in relative (ratio) or

absolute (difference) terms. Each category corresponds to a given section or sub-section.

3. Ratios performance / risk

Insert exhibit 2 approximately here

In the first class, we consider all measures that are computed as a ratio dividing the performance by a risk

measure (category Asset Selection/Standardized/Relative). The sub-classifications are made according to

how risk is measured.

3.1. Absolute risk

3.1.1. Sharpe ratio and close variations

The original measure of this kind is the Sharpe ratio [Sharpe, 1966], defined as the ratio of the mean

return in excess of the risk free rate over its standard deviation. It rests on the hypothesis that returns are

normally distributed and/or that the investor has a utility function whose only arguments are expectation

and variance of returns. Simplicity and ease of interpretation are the main strengths of this ratio4. For

these reasons, it is still widely used by financial institutions to compare the performance of mutual funds.

Central to the usefulness of the Sharpe Ratio is the fact that an excess return represents the result of a

"zero-investment strategy". So, it represents the payoff from a unit of investment financed by borrowing.

And as it refers to total risk, it can be used for a well-diversified financial portfolio, which is meant to

represents an individual’s total investment. Another important quality is that it cannot be manipulated by

leverage – which is a weakness of Jensen’s alpha that we present below.

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 On the other side, the Sharpe ratio exhibits numerous drawbacks as well. First, it does not quantify

the value added, if any: it is only a ranking criterion. It also assumes frictionless financial markets, so that

it is possible to borrow to invest more than 100% in a risky portfolio – and this is not always possible.

The risk free rate is constant and identical for lending and borrowing. In its computation, the choice of

risk-free rate is important, as it affects rankings – though the impact is rather weak.

The Sharpe ratio is an absolute measure that does not refer to a benchmark.5 It equally measures the

performance of the portfolio and the performance of the market in which the portfolio is invested.

Considering the point of view of the investor, his investment horizon must match the performance

measurement period. Furthermore, as it measures the total risk, Sharpe ratio is only suitable for investors

who invest in only one fund. In case of aggregation of portfolios, its consolidation is not straightforward

because of the covariance effects between volatilities.

Its interpretation is also difficult when it is negative: if risk increases, the Sharpe ratio also increases.

To tackle this issue, Israelsen [2005] proposes the Israelsen’s modified Sharpe ratio in which he

exponentiates the denominator with the excess return divided by its absolute value. With this measure, the

values have a wider range in size, but do not give useful information in absolute.

A problem rarely mentioned is the sampling error embedded in the values of the ratio. The estimate

of the standard deviation is measured with statistical noise. Vinod and Morey [2001] introduce the double

Sharpe ratio, computed as the quotient of the Sharpe ratio estimate by its standard deviation. To compute

it, they use a bootstrapping methodology and generate a great number of resamplings from the original

return sample.

The assumption of a Gaussian returns distribution does not hold for many funds, in particular for

hedge funds, so different statistical adaptations were proposed in the literature. Spurgin [2001] shows that

with the issuance of out-of-the-money options, the manager of a fund can enhance the Sharpe ratio by

enhancing the mean-variance trade-off and altering the tail of his portfolio. Statistical variations are

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proposed to tackle this issue, by including higher moments in the formula. Zakamouline and Koekebakker

[2008] propose the adjusted for skewness Sharpe ratio (ASSR), and even an adjusted for skewness

and kurtosis Sharpe ratio (ASKSR). Watanabe [2006] also considers these third and fourth moments,

but in a simpler form, in his Sharpe + skewness/kurtosis ratio.

Mahdavi [2004] introduces an adjusted Sharpe ratio (ASR) to evaluate assets whose return

distribution is not normal. The approach is to transform the payoff so that its distribution will match that

of the benchmark: once the return is transformed, the resulting Sharpe ratio of the asset can be directly

compared to that of the benchmark, knowing the total payoffs from both instruments have exactly the

same distributions.

Lo [2002] shows that standard deviations at the denominators present serial correlations for hedge

funds and that leads to results till 70% too high. He suggests a Sharpe ratio adapted to autocorrelation

whose formula included a bias corrector. In fact, this is more a bias corrector than a true new measure.

Even, the idea to multiply a performance measure by a bias corrector can be extended to every other

performance measure.

The reference value in Sharpe ratio is the risk free rate. An interesting variation is proposed by Roy

in 1952, so fourteen years before Sharpe. He proposes to compare the return to a reserve return that is

specific for the investor. So, Roy’s measure permits to consider different utility functions – in general,

the greater the reserve return, more the portfolios having a higher return are ranked – but it faces all other

drawbacks of Sharpe ratio. Indeed, in many measures, authors use both the risk-free and the reserve

return in the numerator.

Despite all these statistical adaptations, most issues of the Sharpe ratio remain. This explains why

many variations of the Sharpe ratio were introduced.

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3.1.2. Other absolute risk measures

3.1.2.1 Half- and semi-variance

By using standard deviation of returns, the Sharpe measure puts both positive and negative variations

from the average on the same level. But most investors are only afraid of negative variations. The Sharpe

ratio does not make any distinction between upside risk and downside risk.

In the reward to half-variance index, introduced by Ang and Chua [1979], the standard deviation is

replaced by the half-variance which considers only the returns lower than the mean. Pure downside-risk,

i.e. only pure losses with a return lower than zero, is considered in the downside-risk Sharpe ratio

[Ziemba, 2005].

Within this category, the most widely used measure is the Sortino ratio6 because of its flexibility. It

combines previous measures, subtracting like Roy a reserve return in the numerator, and considering the

same reserve return in the computation of the semi-variance at the denominator. Watanabe [2006]

improves it in the same direction as the Sharpe ratio, with his Sortino + skewness/kurtosis ratio.

A refined variation is the Sortino-Satchell ratio [Sortino, 2000; Sortino and Satchell, 2001]7, in

which the semi-variance related to a reserve return is replaced by lower partial moment of order q – it

coincides with Sortino ratio when q = 2. The introduction of a power index permits the consideration of

the investor’s degree of risk aversion: in practice, a value of q = 0.8 is used to describe an aggressive

investor and 2.5 for a conservative investor.

3.1.2.2 VaR and CVaR

Another idea is to consider the Value at Risk (VaR) as a risk indicator. Value at Risk is the measure

selected by the investor who is mostly concerned by disasters, i.e. rare events. For instance, if we consider

a threshold α of 5%, VaRα will give the minimum loss that will happen in the worst 5% of the cases.

Dividing the VaRα by the initial value of the portfolio, we obtain a percentage of loss which is a risk

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indicator and can be used as denominator in the Sharpe ratio. Dowd [1999, 2000] calls it logically Sharpe

ratio based on the Value at Risk. This measure also tackles one important drawback of the Sharpe ratio,

its inability to distinguish between upside and downside risks. It also discriminates the irregular losses as

opposed to repeated losses. It is particularly useful when making hedge decisions, as it permits to avoid

the excessive use of micro hedges against individual risk exposures.

The accurate numerical estimation of the VaR is computationally intensive and can be quite complex,

especially needing large databases. So, Favre and Galeano [2002], propose the Sharpe ratio based on

Cornish-Fisher VaR. Its formula includes the third and fourth moments of the distribution, so also

presenting the advantage to cover non normal distribution of returns.

There are other issues related to the VaR. It is sensitive to the selected threshold, as conflicting

results happen sometimes at different confidence levels. As for any quantile measure, it is not sub-

additive, which implies that portfolio diversification may lead to an increase of risk. It does not measure

losses exceeding VaR, which are definitely of interest, even more than the VaR itself. Finally, VaR has

many local extremes, leading to unstable rankings.

Instead of using the VaR, the Sharpe ratio based on the Conditional Value at Risk, i.e. the

average loss when it is superior to the VaR, introduced by Artzner et al. [1999]8, meets the last two

drawbacks. It assesses how deep is the loss in case of a disaster, and not anymore to estimate the

threshold from where one can speak of disaster.

3.1.2.3 Miscellaneous with absolute risk

Various suggestions to estimate risk have led to other versions of the Sharpe ratio. They are too different

to be attached to a specific group, and we list them with their main characteristics.

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 A possibility is to consider the mean absolute deviation in the denominator, as in the mean absolute

deviation (MAD) ratio of Konno and Yamazaki [1991]. This ratio is more robust to outliers than the

Sharpe ratio.

The Gini ratio, proposed by Yitzhaki [1982], is the ratio between the excess return from the risk-free

rate and its Gini coefficient. Gini coefficient is a measure of dispersion that depends on the spread of

values among themselves, rather than on the deviations about some fixed central point like the mean, as is

computed the standard deviation. It is often used in the economics literature to measure income dispersion

and the discriminatory power of rating models in credit risk management. It shares many properties with

the variance, but appears to be more informative for distributions that depart from normality. It also has

the advantage of being linear.

Young [1998] introduces the Minimax ratio as the ratio between the expected excess return and the

Minimax risk measure, the latter being the maximum loss over all past observations. On one hand, it can

be seen as an extreme sub case of the Sharpe ratio based on the Conditional Value at Risk; on the other,

one can see the MAD as based on a L1 risk measure – indifference to risk over any linear region of the

piecewise function -, Sharpe ratio as based on a L2 risk measure – risk is the square root of the sum of the

square errors to the mean -,and the Minimax on a L∞ - strong absolute aversion to downside risk. The

Minimax ratio is easy to compute, but strongly affected by outliers in the historical data.

Martin and Mc Cann [1989] propose the Ulcer performance index. The denominator is the Ulcer

index, computed as the quadratic mean of the percentage drops in value during the observed period; Ulcer

index measures the depth and the duration of percentage drawdowns in price from earlier highs. While

remaining easy to compute, it presents a couple of concrete advantages compared to Sharpe ratio: it

considers only downward changes, and the strings of losses that result in significant drawdowns in value

are recognized.

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 The Sharpe-Omega9 is introduced by Kazemi and al. [2004] as the ratio of the expected excess return

over the value of a put option on the return of the portfolio. It is assumed to be a reasonable measure of

the investment’s riskiness, as the price of the put option is the cost of protecting an investment’s return

below the target ratio.

Finally, the interest in finance to the stable modelling drives Rachev and Mittnik [2000] to consider

the stable ratio. Among many non-Gaussian distributions that are proposed in the literature to model

asset returns that presents empirically an excess kurtosis, the stable Paretian distribution has unique

distinctive characteristics that put it on the top of the list. The stable dispersion measure is the scale

parameter of a stable Paretian distribution.

3.1.3. Ratio of gain and shortfall aversion

The spirit of this class of measures is very close to the ratios “performance / risk” presented above. The

extension is here that performance is measured as a potential gain divided by a loss exposition.

3.1.3.1 Classical measures of loss

Bernardo and Ledoit [2000] introduce a measure defined as the ratio of the expectation of the positive

part of the returns divided by the expectation of the negative part. The Bernardo-Ledoit gain-loss ratio

has gained a lot of popularity thanks to Shadwick and Keating [2002] who rebrand it under the name

Omega. It is frequently used for hedge funds as it incorporates all the higher moments of the distribution.

The reserve return can be chosen arbitrarily. If it is set to the mean of the distribution, the measure

equals 1. It does not need any benchmark or index to be computed. However, Bernardo and Ledoit

propose a version in which the reserve return is replaced by an index, so that index funds will get a zero

performance and only those funds that beat the index will receive a positive score.

The ratio can be interpreted as the quotient of a call option and a put option, both having an exercise

price equal to the reserve return. Each element of the fraction can be approximated using the Black and

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Scholes formula. The price of the call is the cost of acquiring the return above the threshold; the price of

the put is the cost of protecting the return below the threshold.

The upside potential ratio (UPR) proposed by Sortino et al. [1999] relies on a similar idea. The

numerator is the expected return above the reserve return and can be seen as the potential of success. The

denominator is downside risk as calculated in the Sortino ratio. Unlike the Sortino ratio, the UPR uses the

same reference rate for evaluating both profits and losses. Furthermore, the UPR increases with its

numerator – which measures the expected return above minimum acceptable return – and decreases as its

denominator – downside risk – increases. The UPR delivers therefore performance outputs that conform

the wishes of the investors: to obtain rise potential while protecting against losses.

Farinelli and Tibiletti [2008] propose a generalized measure. The Farinelli-Tibiletti ratio is the ratio

of an upper partial moment of order p to a lower partial moment of order q. The values of p and q depend

on the desired relevance given to the magnitude of the deviations: the higher p and q, the higher the

investor’s preference for (expected gains with p) or dislike of (expected losses for q) extreme events. The

Bernardo-Ledoit measure or Omega is a particular case with p = 1 and q = 1, while the upside potential

ratio is another particular case, with p = 1 and q = 2.

3.1.3.2 CVaR as measure of loss

Like for the Sharpe ratio, the CVaR as an alternative measure of risk is worth considering: it is proposed,

by Biglova et al. [2004] as the Rachev Ratio. It is the ratio between the CVaR of the opposite of excess

return at a given confidence level, α, and the CVaR of the excess return at another confidence level, β.

The values of the parameters can be adjusted to fit investment style: taking α and β close to 0.5

correspond to a moderate style, while lower α and β reflect more aggressive styles. The same paper

proposes even a Rachev generalized ratio in which the authors introduce power indexes that vary in

respect to the investor’s degree of risk aversion and attraction to high returns.

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3.1.3.3 Maximum drawdown as measure of loss

Another idea is to replace the notion of standard deviation – or one of its variations – by the maximum

drawdown in the considered period, a parameter that investors often consider. Fundamentally, on a

considered period, this figure represents more a regret, the loss between a peak and a valley, than an

effective loss. Four measures emerge.

The Calmar ratio [Young, 1991] is simply the total amount of return divided by the maximum loss

on the considered period. An obvious drawback of this measure is its sensitivity to outliers, so Sterling

Jones10 proposes the Sterling ratio. The denominator is the average of the drawdowns during the period,

to which one adds an arbitrary threshold of 10%. It adjusts for the fact that short term calculations of

drawdown are understated compared with the annual drawdown figure. This adjustment presents a

drawback: if the average drawdown for any of the funds analyzed is less than minus this threshold, then

the denominator becomes negative and comparison with other funds is meaningless – an issue we already

met with Sharpe ratio. That is the reason why this threshold is sometimes omitted.

The Sterling-Calmar is an alternative to get the best out of these two ratios, considering the average

of the N maximum drawdowns on the denominator. Finally, in the Burke ratio [Burke, 1994], the

denominator is the square root of the sum of the squares of the N largest drawdowns. As the Sterling

ratio, it is less sensitive to outliers.

3.2. Systematic risk

3.2.1. Treynor ratio and variants

One year before Sharpe, Treynor [1965] introduces the Treynor ratio computed with a similar formula,

but considering the systematic risk of the portfolio at the denominator. Most of its drawbacks are those of

Sharpe ratio, with some specificities. It requires the choice of a good reference index, because the

denominator heavily depends on the selected benchmark. It is inadequate if the market exposure varies

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because the beta can be distorted. Unlike the Sharpe ratio, its computation is straightforward for portfolio

aggregation, because the beta is a weighted sum of constituent’s betas, and it is relevant for a portfolio

that does not cover the whole patrimony of an individual.

As for the Sharpe ratio, three directions are proposed to give it more flexibility: introducing a reserve

return instead of the risk-free return, keeping only the negative deviations at the denominator, and finally

considering lower partial moments of order k. A generalized formula is proposed by Srivastava and

Essayyad [1994] for Treynor ratio based on lower partial moments.

3.2.2. Black-Treynor ratio and generalization

Treynor and Black [1973] consider alpha, which is an adequate measure of excess return, at the

numerator instead of the excess return. The so-called Black-Treynor ratio has all advantages of alpha –

see below , and the division by beta permits the comparison of different portfolios, independently of their

systematic risk.

The original Jensen’s alpha is often replaced by a better alpha, extracted from the regression of a

multi-factor econometric model. Hübner [2005] introduces the Generalized Black-Treynor ratio that

combines the advantages of the Black-Treynor ratio with the use of the multi-dimensional model.

3.3. Non systematic risk

We consider here the risk that can be eliminated by diversification.

3.3.1. Moses, Cheney and Veit’s measure

Moses, Cheyney and Veit [1987] propose a measure computed as the product of Jensen’s alpha by the

return in excess to the risk-free rate, divided by the non systematic risk. Moses, Cheney and Veit’s

measure shows the arbitrage that makes the manager of a fund, between the level of diversification of the

portfolio – at the denominator – and his performance compared to the market –at the numerator.

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3.3.2. Information ratio and variations

The idea underlying the information ratio (or IR) – also called the appraisal ratio – proposed by Grinold

[1989] is to get the performance relative to a given reference portfolio. It measures the excess return of

the fund over a given benchmark, divided by the standard deviation of the excess return – or more

concretely, the degree of regularity in outperforming the benchmark.

The excess return over the benchmark results from the choices made by the manager to overweight

assets that he hopes will exceed that of the benchmark. A passive management gives a null ratio. The

denominator, also called “tracking error”, reflects the cost of an active management.

This ratio has some major drawbacks. First, it requires much data to assess its significance. The

sensitivity to the selected benchmark is also a concern: Goodwin [1998] estimates that is has a notable

impact, which is contradicted by Gillet and Moussavou [2000]. Next, if a fund tracks an index closely,

with a small tracking error, little changes in excess return swing the information ratio from largely

positive to largely negative or vice versa. As for the Sharpe ratio, Israelsen [2005] partially tackles this

issue by introducing Israelsen’s modified information ratio where the tracking error is exponentiated.

Finally, this ratio also considers equally positive and negative variations from the index: an issue solved

considering an information ratio based on semi-variance [Gillet and Moussavou, 2000].

4. Incremental return

Insert exhibit 3 approximately here

In the second class, we consider all measures that are computed as an absolute return by subtracting a

penalty from the measure of wealth (category Asset Selection/Standardized/Absolute).

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4.1. Incremental return versus market

4.1.1. Analytical measures

Starting from a certain portfolio, it is possible to borrow or lend at the risk-free rate to adjust portfolio risk

to the one of the market portfolio. The M² index (or RAP, for risk-adjusted performance) is so introduced

by Modigliani and Modigliani [1997] as the incremental return added as compared to the level of market

risk. This measure, expressed in basis points, is easy to interpret. Rankings are independent of the chosen

benchmark, as it only plays the role of a scaling factor. However, it is just a linear function of the Sharpe

ratio and not really a new measure. As a consequence, it shares the disadvantages of Sharpe ratio.

Scholz and Wilkens [2005a] propose a similar measure, replacing the ratio in the formula by the

inverse of the beta of the fund. Their market risk-adjusted performance measure (MRAP) permits a

comparison of portfolio returns with those of the market, and it is easy to interpret. As it measures returns

relative to market risk instead of total risk, it is suitable for investors that invest in many different assets.

This index is equal to the Treynor ratio plus the risk-free rate. The same paper introduces the differential

return based on RAP. It is computed as the difference between the M² of the portfolio and the M² of the

market index (which is also its average return).

Lobosco [1999] proposes the style risk-adjusted performance measure (SRAP). It looks like the

M², but uses a style benchmark instead of a single index. It enables a more accurate evaluation of the

manager’s performance.

Statman [1987] makes another attempt in this direction with the excess standard deviation adjusted

return (eSDAR). It represents the excess return of the fund over the market, where the fund is leveraged

to have the same standard deviation. Its value is equal to M² measure minus the return of the market.

Finally, Aftalion and Poncet [1991] introduce a variant where the unobservable market portfolio is

replaced by a benchmark representative of the portfolio universe. The Aftalion and Poncet index

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measures the gap between the return of the portfolio and the return of its benchmark – positive

contribution in the formula – taking into account the difference in risk – negative contribution in the

index. The only difficulty is to estimate the market price of risk.

4.1.2. Efficient frontier based measures

Cantaluppi and Hug [2000] propose the efficiency ratio which is the distance to the efficient frontier, in a

two-dimensional world risk/return. Instead of answering to the question “what is the performance of the

portfolio relative to others?”, this measure cares about “which performance could the portfolio achieve?”

Graham and Harvey [1997] tackle two main issues of Sharpe ratio: it assumes that the risk-free rate is

constant and not correlated to risky assets returns; and the estimates are not precise enough when fund

volatilities are too different. The Graham and Harvey measure 1 (GH1) derives from drawing a convex

efficient frontier using a reference index and T-bills. GH1 is the difference in return with the portfolio

located on the efficient frontier that has the same risk. As it is the under/over-performance compared to a

portfolio composed with the index of the market and cash, it is easy to interpret. Graham and Harvey’s

measure 2 (GH2) is obtained by constituting a set of portfolios that combines a given fund and cash, and

then considering the portfolio that has the same volatility as the market index. The measure is the

difference between the return of this portfolio and the market index return. It generalizes M², which

assumes that cash return has zero variance and zero covariance with other assets.

4.2. Incremental return versus benchmark

4.2.1. One factor model

4.2.1.1 Jensen’s alpha

The original measure in this class is Jensen’s alpha [1968]. It is defined as the difference between the

return in excess from the risk free rate, and the return at equilibrium in excess of the risk free rate, taking

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into account the systematic risk of the portfolio. It has always been very popular, because it is has the

dimension of a return and is easy to interpret. It reflects the manager’s ability to earn a return above the

equilibrium return indicated by the security market line. Like the Sharpe ratio, its drawbacks are

numerous. Jensen’s alpha depends on the choice of a benchmark 11 to represent the market portfolio.

Being proportional to beta, it does not enable a comparison of portfolios with different levels of risk.

Thus, except in peer groups, it can not be used as a ranking criterion. It is also inadequate with a time-

varying fund’s market exposure. It can also be manipulated by leverage. It also suffers from the limits of

the CAPM model, which are not often verified in reality.

4.2.1.2 Variations over Jensen’s alpha

Before considering extensions of Jensen’s alpha, we enumerate some variations that have been proposed

in the financial literature, but never getting as popular as Jensen’s alpha.

The standardized Jensen’s alpha is computed dividing Jensen’s alpha by its standard deviation. It is

linked to the alpha, but it includes the degree of confident that we have in the estimation of the model: if

we consider two funds having the same alpha, but one being estimated with a good model and the other

with a worse, the standardized alpha of the first will be superior and the second inferior to 1.96 - which

corresponds to a confidence level of 99% .

Black [1972] shows that the CAPM theory was valid without the existence of a risk-free asset, and

develops a version of the model by replacing it with an asset or portfolio having a beta of zero: this

measure, called Alpha with Black’s zero-beta model, is not often used by practitioners who dispose of

various variants for the risk-free rate.

Brennan [1970] develops a version of the CAPM that allows the impact of taxes on the model to be

taken into account. He derives the alpha with Brennan’s model taking taxes into account.

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 Fama [1972] introduces the total risk alpha that measures the manager’s stock picking skills, and

can be explained this way: if we consider a target risk σp, a portfolio BP having this total risk can be

obtained by combining the market portfolio and the risk-free asset. A manager can try to obtain a

different return by stock-picking, building a portfolio P with this fixed level of risk. The difference of

returns Rp – RBP measures the manager’s stock picking skills. Conversely to Jensen’s alpha, it integrates

total risk, as the benchmark portfolio represents the market index matched to the total risk of the fund.

For a portfolio invested on two markets, McDonald’s measure [McDonald, 1973] determines each

market’s contribution to the total performance of the portfolio. Pogue et al. [1973] generalize this formula

to a portfolio containing several asset classes and invested in several markets, allowing the evaluation of

the manager’s capacity to select the best performing assets and invest in the most profitable markets.

A Jensen’s alpha adjusted for stale prices is proposed by Scholes and Williams [1977] and

Dimson [1979]. It adds three lagged market betas β1, β2, and β3 to the contemporaneous beta β0. If the

lagged betas are found to be significant at 5%, then we take this α; otherwise, it is the common Jensen’s

alpha. An alternative version, proposed by Fung et al [2004], is to consider this alpha when the sum of the

lagged betas is significant.

Leland [1999] replaces the betam in Jensen’s formula by a betap adjusted to the utility of the

investors. Leland’s alpha relies on the hypothesis that the investor has a power utility function, and also

that there is an asymmetry in the evaluation of the systematic risk. It is useful in the context of non linear

instruments, to tackle the fact that Jensen’s alpha can be artificially increased by leverage.

4.2.2. Multi-factors models

4.2.2.1 Alpha with multi-factors models

The consideration of multi-factors models is justified by the weaknesses of the CAPM model - which

underlies previous classical measures – that were reported by Roll [1977]. These models try to explain

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portfolio returns by sets of macroeconomic versus microeconomic, and explicit versus implicit risk

factors.

In this class, two occurrences are very popular. Alpha based on Fama and French’s three factors

model is the first one. Fama and French [1992, 1993] set in evidence the fact that, complementary to the

beta, the book-to-market ratio and company size measured by its market capitalisation are two factors that

characterize a company’s risk. Carhart [1997] adds a fourth factor: alpha based on Carhart’s four

factor model includes momentum, which is the difference between the average of the highest returns and

the average of the lowest returns from previous year.

Other microeconomic multi-factors models are proposed in the literature. For instance the multi-

factor Alpha for Hybrid funds, which is mentioned by Elton et al. [1993], adds to Fama and French’s

model a factor specific for funds that include bonds in their portfolio.

Finally, the alpha based on Barra’s model uses no less than thirteen risk indices [Sheikh, 1996].

4.2.2.2 Alpha with conditional models

A complementary way in computing alpha is to introduce conditional betas as in Ferson and Schadt

[1996]. The underlying idea is to remove, from the performance measure, an investment strategy that can

be replicated using public information. Conceptually, this class of models suppose that risk premiums in a

moment t can be predicted at t-1 considering variables – called “instruments” - whose values are observed

in t-1. This idea of varying betas appears to be particularly relevant for at least three reasons: the betas of

the assets in a portfolio are changing over time; changes in prices induce a change in the weights of an

even passive portfolio; and active management with buys and sells are better modelled.

Christopherson et al. [1999] dig deeper into this idea, assuming that the alpha also follows a

conditional process. They propose to let excess performance varying over time. The conditional alpha

appears to answer a remark already mentioned in Jensen’s original paper: alphas of funds are negative

19
more often than positive, which has been interpreted as inferior performance. However, using conditional

alphas, the distribution of alphas shifts to the right and is centred near zero.

4.2.2.3 Extensions of CAPM-based measures

Three measures rely on extensions of the CAPM. Harvey and Siddique [2000] generalise Fama and

French’s model by considering the third moment of the distributions12. Alpha based on Harvey and

Siddique’s model is then particularly dedicated to funds that present a non normal distribution of returns.

Hwang and Satchell [1999] consider a three-moment CAPM and a quadratic return generating

process. The higher moment measure of Hwang and Satchell emphasizes the importance of

coskewness and cokurtosis, but suffers from the other limitations of Jensen’s alpha.

Gomez and Zapatero [2003] propose an alpha based on a two-factor CAPM. Together with the

market beta, a new risk factor – called active management risk – is brought into the analysis. The new

beta is defined as the covariance between the asset excess return and the excess return of the benchmark

index normalized to its variance.

4.3. Difference between gain and shortfall aversion13

Melnikoff [1998] suggests characterizing the investor’s aversion to shortfall by a constant which

represents its gain-shortfall trade-off, i.e. the relation between the expected gains desired by him to make

up for a fixed shortfall risk. Melnikoff’s measure is computed as the difference between the return of the

portfolio and the average annual shortfall rate, multiplied by the weight of the gain-shortfall aversion

minus one. This measure depends clearly on the profile of the investor, which is an advantage – it is more

precise – but also a drawback – as two investors will have two different rankings, so it is difficult to

compare the quality of this measure to another one.

This drawback is also shared by the Sharpe alpha, as mentioned by Plantinga and De Groot [2001],

defined as the return of the portfolio minus its variance multiplied by a coefficient of aversion to shortfall

20
specific to the investor with a quadratic utility function. The ranking depends on the chosen coefficient.

Fouse’s index [Sortino and Price, 1994] relies on downside risk through the semi-variance. With the

coefficient of aversion to risk, a second parameter has to be selected here: the reserve return.

5. Preference-based measures

Insert exhibit 4 approximately here

We discuss performance measures that explicitly account for the investors’ risk preferences through the

use of a utility function (category Asset Selection/Individualized).

5.1. Direct translation of preferences

5.1.1. Utility functions based

Hodges [1998] relates the Sharpe ratio to investor preferences for an exponential utility function, in a

situation where returns are normally distributed. Relaxing the latter hypothesis, he determines a

generalized Sharpe ratio.

Stutzer [2000] assumes that investors aim to minimise the probability that the excess returns over a

given threshold will be negative over a long time horizon. When the portfolio has a positive expected

excess return, this probability decays asymptotically to zero at an exponential rate. Portfolios with high

probability decay rates are preferable to those with low decay rates. The maximum possible rate is

defined as the Stutzer index of convergence. Unfortunately, this measure is not intuitive. Furthermore,

this rate is the opposite of the maximum expected utility of an investment in the portfolio, computed with

an exponential utility function. So, it is linked to Hodges’s measure in a straightforward manner.

Kaplan [2005] considers utility functions that are decomposed into an expected return component

and a loss penalty function that has an exponential type. He calls lambda the measure obtained by

considering the optimal utility.

21
 These three measures have the common drawback that their computation requires the solving of a

maximization problem.

Morningstar regularly publishes rankings of funds, based on its own methodology [Morningstar,

2007]. It tries to estimate the utility provided by the portfolio for an investor that has a power utility

function. The Morningstar risk adjusted return is very important in practice, because the rankings that

it publishes are followed by many investors.

Sharma [2004] proposes the alternative investments risk adjusted performance (AIRAP) which

has only two slight differences from previous measure: it uses total returns instead of surplus returns, and

it computes an average yield. Among all advantages, this measure captures all observed higher moments,

works even when mean returns are negative, can be formulated as a modified Sharpe ratio, and is

invariant to wealth level. Downside variance is more penalizing than with Sharpe ratio.

Ingersoll et al. [2007] define a measure as one that has four properties which characterize the fact that

it is not vulnerable to manipulation. The manipulation-proof performance measure appears to be

similar in substance and nearly in form to the Morningstar measure.

Finally, Pézier [2008] introduces a certain equivalent return (CER) for an investor and an asset, as the

minimum sure excess return above the risk-free rate on total wealth the investor quote to be equally

attractive. Then, he defines the maximum certain equivalent excess return (CER*) as the CER of the

optimal allocation of the investor’s total wealth to the considered asset and the risk-free asset. This

measure is expressed in basis points, so it is easy to interpret. This generalization does not make any

restriction to the distribution of the returns, takes into account the investor's risk attitude – as any personal

utility functions is possible -, and permits to consider the context of the investment (horizon, availability

of a risk-free asset…). A CER* can also be translated, by positive monotonic transformations, into

equivalent criteria onto other scales such as generalized Sharpe ratios.

22
5.1.2. Miscellaneous

Many measures already seen have a parameter specific to the considered investor, but next one, proposed

by Scholz and Wilkens [2005b] is particular, based on the following situation. Let us consider an investor

who is already holding a portfolio P, and wants to invest additional money in a portfolio D i without

changing his initial portfolio. They define the investor specific performance measure as a measure

based on the variance of the new portfolios, considering that the Di with the lowest variance dominates all

others for a given expected return. In particular, if the portfolio P is the market index, this measure is

determined by the Sharpe and Treynor ratios and permits to arbitrate between two funds, one having the

best Sharpe and the other the best Treynor ratios.

Muralidhar [2000, 2001] introduces the M³ or Muralidhar’s measure, indicating how to construct

portfolios that satisfy an investor’s objectives. The idea is to create portfolios invested in an investment

fund, a benchmark and the risk-free asset with proportions a, b and 1-a-b respectively. Assume that the

investor accepts a certain level of annualised tracking error compared to his benchmark, which we call

objective tracking error. Parameters a and b are computed in such a way that the portfolio obtained has a

tracking error equal to the objective tracking error and its standard deviation is equal to the standard

deviation of the benchmark. The obtained portfolio is called “correlation-adjusted portfolio” as the

constraint on the tracking error creates a target correlation between the portfolio and the benchmark. Once

the optimal proportions have been calculated, we compute the return of the correlation-adjusted portfolio

for the fund. Compared to M² measure, it includes the differences in standard deviation and the

correlation of each portfolio with the benchmark and the correlations between the portfolios themselves.

One can observe that if no tracking error exists, M³ = M².

The same author proposes in 2002 the skill, history and risk-adjusted measure. This measure is the

product of M³ by a measure of confidence in skill. So this new measure has all properties of M³, but

allows differences in data history to be taken into account: two portfolios with identical variances,

23
information ratios and tracking errors, but differing only in length of history will yield different

confidence levels in the skill of their managers.

5.1.3. Prospect theory based

Prospect theory is an alternative theory proposed by Khaneman and Tversky [1979], in reaction to the

expected utility theory. Expected utility theory is unable to explain why people are often simultaneously

attracted to both insurance and gambling. Under prospect theory, value is assigned to gains and losses

rather than to final assets; also probabilities are replaced by decision weights which are generally lower

than probabilities. It is in this context that is introduced a prospect ratio. As for the Sharpe and Sortino

ratios, Watanabe [2006] suggests a prospect + skewness/kurtosis ratio.

5.2. Indirect translation of preferences

When the composition of the fund is known, new measures are possible.

Cohen et al. [2005] propose two measures whose specificity is to exploit information contained in the

holdings and returns of other funds. Their idea is to evaluate a manager’s decisions by comparison to the

decisions of managers whose performances are superior – so they need to choose a first measure to

evaluate them, for instance the alpha. Cohen, Coval and Pastor’s measure based on levels of holding is

the weighted sum of a quality measure for each asset in the fund. This measure is derived from the

performance of all managers who had this asset in their portfolio.

In Cohen, Coval and Pastor’s measure based on changes in holding, the weights are covariances

between the changes in the portfolio and those of the other managers: a manager is rewarded if he buys

assets also purchased by managers with a good performance and if he sells assets purchased by managers

with a weak performance.

Daniel et al. [1997] decompose the total performance of a fund in characteristic selectivity,

characteristic timing and average selectivity. These three Daniel’s measures are computed using a

24
method that forms benchmarks by directly matching the characteristics of the component stocks of the

fund being evaluated. The idea is not too far from the conditional alpha, where time varying weights are

related to instruments, but here the varying weights are the concrete changes in stock holdings.

Going on in this direction, Ferson and Khang [2002] introduce the conditional weight measure,

which combines the weights as in Daniel’s measure and the expected returns as in the conditional alpha.

6. Market timing

Insert exhibit 5 approximately here

Finally, market timing performance measures reflect the managerial skill of adequately timing the market

(category Market Timing).

6.1. Original measures

The first two measures are based on Jensen’s alpha and intend to determine whether its value is due to a

good market timing strategy (remember that good market timing negatively influences the alpha).

Treynor and Mazuy [1966] produce a single factor model derived from the CAPM in which a quadratic

term is added to reflect the market timing. Its coefficient is Treynor and Mazuy’s coefficient. If it is

positive, the portfolio has good market timing because return of the portfolio is as higher as the risk

premium is higher. This coefficient indeed measures the co-skewness with the benchmark portfolio. A

positive value for the independent term of the regression, is considered as a sign of superior stock

selection – but one has to be conscious that is has not the same meaning as Jensen’s alpha.

Henriksson and Merton [1981] start from a similar idea, but provide a different interpretation of

market timing ability. Adding a term in the CAPM model that contains a dummy variable based on the

difference between market return and the risk-free rate, they permit managers to choose between two

levels of market risk – an up-market and a down-market beta. The difference between them is

Henriksson and Merton’s coefficient. Compared to Treynor and Mazuy’s model, it presents the

25
drawback that beta can only have two values, while intuitively the exposure to the market is higher as the

risk premium is higher. Furthermore, Goetzmann et al. [2000] show that this model gives weak results if

it is applied to monthly results of a daily timer.

Chen and Stockum [1986], among others, show that the error term in both of these models is often

heteroscedastic, while Drew et al. [2002] also detect a problem of multicolinearity. These two issues have

to be resolved by ad hoc methods, before using the ordinary least squares regression.

Weigel [1991] extends Henriksson and Merton’s analysis, supposing that a fund can be invested in

three assets: risk-free, bonds and stocks. Weigel’s coefficient has a value of 1 if the manager has a perfect

forecast of the markets; it is between 0 and 1 if he foresees more or less the evolution. If the coefficient is

negative, then his forecasts are bad.

6.2. Extension of original measures

6.2.1. Adding a cubic term

Coming back to funds invested in stocks only, Jagannathan and Korajczyk [1986] add a cubic term in the

original Treynor and Mazuy model. Their Treynor and Mazuy extended timing measure permits to

detect when the cubic term is negative, corresponding to cases of artificial market timing as measured by

the original model.

6.2.2. Multi-factor versions

Bello and Janjigian [1997] propose an extended Treynor and Mazuy’s measure to cover assets that are

not in the main index used to encompass the case of funds that includes bonds.

For more general hybrid funds, Comer [2006] suggests a multi-factor timing measure to consider

systematic risks of the funds to the market, to small stocks, to growing stocks, to long maturity bonds, to

short maturity bonds, to high quality bonds and to low quality bonds.

26
 Henriksson [1984] tries to solve problems that might happen due to both the omission of relevant

factors and issues concerning the choice of the benchmark portfolio in the Henriksson and Merton model.

His Henriksson and Merton extended measure of market timing includes two more factors and a

second dummy variable to introduce the excess return of an equally weighted portfolio of the funds.

Finally, Chan et al. [2002] propose a Henriksson and Merton timing measure in a three-factor

context, which is computed with the same three factor model than Fama and French.

6.2.3. Conditional versions

We saw above that Ferson and Schadt [1996] propose a conditional model that produces conditional

betas. By extension, they propose to consider a conditional Treynor and Mazuy’s coefficient and a

conditional Henriksson and Merton’s coefficient. In general, a typical mutual fund increases its market

exposure when stock returns are low. Using the conditional market timing models, evidence of perverse

market timing for the typical fund can be reduced.

6.3. Period based measures

Grinblatt and Titman [1989a and b] suggest a method that gets portfolio returns over several periods and

attribute a positive weighting to each of them. The Grinblatt and Titman index is the weighted average

of the excess returns. To attribute a null performance to uninformed investors, the weighted average of

the reference portfolio in excess of the risk-free rate must be null. A positive measure indicates that the

manager accurately foresaw the evolution of the market, while an uninformed one has zero performance.

This approach is not very intuitive, and the computations to determine the weights can be complex,

buit data requirements are simple. This measure generalizes other measures, as Jensen’s alpha –equal to

this measure when all investors’ utility functions are quadratic – and the Treynor and Mazuy measure.

Cornell [1979] proposes a measure to evaluate the ability of a manager to pick stocks when they have

higher returns than usual. The Cornell measure is the average difference between the return of the

27
considered portfolio during the period in which the portfolio is held, and the return on a benchmark

portfolio with the same weightings, but considered over a different period. It does not use the market

portfolio: asset returns are the direct references used. Like Jensen’s measure, it attributes a null

performance to a portfolio that has no particular timing or selection skills. Unfortunately, it requires a

large amount of calculations. There is also a possibility that certain securities disappear during the period.

Finally, it requires knowledge of the weightings of the assets that make up the portfolio.

Grinblatt and Titman [1993] propose the performance change measure, based on the study of

changes in the portfolio. It relies on the principle that an informed investor changes the weightings in his

portfolio according to his forecast on the evolution of the returns. His portfolio will thus display a non-

null covariance between the weightings on the assets of the portfolio and the returns on the same assets.

The measure is put together by aggregating the covariances. Unlike the Cornell measure, it does not use

any benchmark portfolio. However, it requires the knowledge of asset returns and of their weightings

within the portfolio. It is limited by the significant number of calculations and data requirement.

6.4. Miscellaneous

The measure of performance based on pure market timing introduced by Sweeney [1988] gives the

abnormal return during a defined period. It considers transactions costs as well as changes in the

portfolio. It is however limited to two assets, one risky and the other riskless, and supposes that the

portfolio is always fully invested on one of them.

Bhattacharya and Pfleiderer [1983] suggest a quadratic model with the same origin as Treynor-

Mazuy’s model. In the Bhattacharya and Pfleiderer measure of market timing, timing ability is

defined as the correlation between the manager’s forecasts and the excess market return. The latter can be

estimated directly from the returns of the benchmark excess returns, while the first one is estimated from

a quadratic model [Stevenson, 2004].

28
7. Conclusion

We showed in this paper that more than one hundred measures have been proposed in the literature to

evaluate the performance of a fund, including the notions of return and risk. Each of them has its

strengths, but also its weaknesses and limits. They encompass various dimensions that make sense for

most of them. Hence, it would be unfair to say that “one size fits it all”. Our ongoing efforts try to

arbitrate between them and to distinguish those who can be considered as the most significant in general

to explain portfolio performance but also persistence.

Next, one should also attempt to classify them in terms of their relevance under various economic

contexts (volatile or not, bear or bull…), regarding different type of funds (stocks only, including

bonds…) and durations (short term, medium term, long term). Eventually, studies of the persistence in

performance, and the detection of the best portfolio managers, should adequately encompass the relevant

dimensions of performance.

29
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Exhibit 1.

Portfolio
performance
measures

Market timing
Skill Asset selection (Section 6)
15 measures

Preference-based
Standardized
measures
Individualization risk-adjusted
(Section 5)
measures
17 measures

Return-based ratios Return-based differences

Return

(Section 3 except 3.1.3) (Section 4 except 4.3)

31 measures 26 measures
Value creation

Gain-based ratios Gain-based differences

Gain

(Subsection 3.1.3) (Subsection 4.3)

9 measures 3 measures

Relative (ratio) Absolute (difference)

Translation

35
 Exhibit 2.

3. Ratios
performance / risk

3.2. Systematic 3.3. Non

3.1. Absolute risk
risk systematic risk

3.2.1. Treynor ratio and 3.2.2. Black-Treynor 3.3.2. Information ratio

3.3.1. Moses,
variants ratio and generalization and variations
Cheney and Veit’s
- Treynor ratio - Black-Treynor ratio - Information ratio
measure
- Treynor ratio based on - Generalized Black- - Israelsen’s modified
lower partial moments Treynor ratio information ratio
3.1.1. Sharpe ratio and - Information ratio based
close variations on semi-variance
- Sharpe ratio
- Israelsen’s modified
Sharpe ratio
- Double Sharpe ratio
- Adjusted for skewness
Sharpe ratio
- Adjusted for skewness
and kurtosis Sharpe ratio 3.1.2. Other
3.1.3. Ratio of gain and
- Sharpe + skewness/ absolute risk
shortfall aversion
kurtosis measures
- Adjusted Sharpe ratio
- Sharpe ratio adapted to
autocorrelation
- Roy’s measure

3.1.2.1. Half- and semi-variance
- Reward to half-variance index
- Downside-risk Sharpe ratio
- Sortino ratio
- Sortino + skewness/kurtosis ratio
- Sortino-Satchell ratio (Kappa)
3.1.2.2. VaR and CVaR
- Sharpe ratio based on the
VaR
- Sharpe ratio based on
Cornish-Fisher VaR
- Sharpe ratio based on CVaR
(STARR ratio)
3.1.2.3. Miscellaneous 3.1.3.1 Classical measures 3.1.3.2. CVaR as measure 3.1.3.3. Maximum drawdown as
- Mean absolute deviation ratio of shortfall aversion of shortfall aversion measure of shortfall aversion
- Gini ratio - Bernardo-Ledoit gain-loss - Rachev ratio - Calmar ratio
- Minimax ratio ratio (Omega) - Rachev generalized ratio - Sterling ratio
- Martin ratio (Ulcer - Upside potential ratio - Sterling-Calmar ratio
performance index) - Farinelli-Tibiletti ratio - Burke ratio
- Sharpe-Omega
- Stable ratio

36
Exhibit 3.

4. Incremental
return

4.1. Incremental 4.2. Incremental 4.3. Difference between

return vs market return vs benchmark gain and shortfall aversion
- Melnikoff’s measure
- Sharpe alpha
4.1. Incremental return 4.1.2. Efficient frontier - Fouse’s index
vs market based measures
- M² (risk adjusted - Efficiency ratio
performance) - Graham and Harvey’s
- Market risk adjusted measure 1
performance - Graham and Harvey’s
- Differential return measure 2
based on RAP
- Style risk adjusted
performance measure
- Excess standard
deviation adjusted return 4.2.1. One-factor 4.2.2. Multi-factors
- Aftalion and Poncet’s model model
index

4.2.1.2. Variations of Jensen 4.2.2.1. Alpha with multi- 4.2.2.3. Extensions of

4.2.1.1. Jensen alpha
alpha - Standardized alpha
- Alpha with Black’s zero-beta
model
- Alpha with Brenman’s model
taking taxes into account
- Total risk alpha
- Mc Donald’s measure
- Jensen alpha adjusted for
stale
- Leland alpha
4.2.2.2. Conditional
factors CAPM based
models
- Alpha based on Fama & - Alpha based on Harvey
- Alpha with
French’s three factors model and Siddique’s model
conditional betas
- Alpha based on Carhart’s - Higher moment of Hwang
- Conditional alpha
four factors model and Satchell
- Multi-factors alpha for - Alpha based on a two-
hybrid funds factor CAPM
- Alpha based on Barra’s
model

37
Exhibit 4.
5.1.1. Utility functions based
- Hodges’s generalized Sharpe
ratio
- Stutzer index of convergence
- Lambda
- Morningstar risk adjusted return
- Alternative investments risk
adjusted performance
- Manipulation-proof
performance measure
- Maximum certain equivalent
excess return
5. Preferences
based
5.2. Indirect
5.1. Direct - Cohen, Coval and Pastor’s
measure based on levels of
holding
- Cohen, Coval and Pastor’s
measure based on changes
in holding
5.1.2. Miscellaneous - Daniel’s measures
5.1.3. Prospect theory - Conditional weight measure
- Investor specific
based
performance measure
- Prospect ratio
- M³ (Muralidhar’s
- Prospect + skewness /
measure)
kurtosis ratio
- Skill, history and
risk-adjusted measure
38
Exhibit 5.

6. Market timing
measures

6.1. Original 6.2. Extension of 6.3. Period-based 6.4. Miscellaneous

measures original measures measures - Performance based on pure
- Treynor and - Grinblatt and Titman market timing
Mazuy’s coefficient index - Bhattacharya and Pfleiderer
- Henriksson and - Cornell measure measure of market timing
Merton’s coefficient - Performance change
- Weigel’s coefficient measure

6.2.1. Adding a cubic 6.2.2. Multi-factors 6.2.3. Conditional

term versions versions
- Treynor and Mazuy’s - Extended Treynor and - Conditional Treynor and
extended timing measure Mazuy’s measure Mazuy’s coefficient
- Multi-factor timing model - Conditional Henriksson
- Henriksson and Merton’s and Merton’s coefficient
extended measure of
market timing
- Henriksson and Merton’s
timing measure on a three
factor context

39
 Endnotes

1
Her paper describes measures much more deeply than we do here; in this way, it is an excellent complement to this paper.
2
This count considers the removal of redundant measures and of measures that have been used in the empirical literature
without a formal discussion of their roots. Even though we have brought our best efforts in this survey, we might still ignore
some recent or very unpopular measures. Nevertheless we feel confident that we encompass a very significant perimeter in
this area.
3
The complete list and formulae of all the 101 measures are available upon request.
4
Furthermore, Sharpe (1994) showed that the Sharpe ratio can be interpreted as a t-statistic to test the hypothesis that the
return on the portfolio is equal to the risk-free return: t-Stat = Sharpe * sqrt(T). A higher Sharpe ratio is consistent with a
higher probability that the portfolio return will exceed the risk-free return.
5
In fact, the implicit benchmark is the risk-free rate.
6
Its name is due to the popularity of this ratio after a paper of Sortino and Van der Meer in 1991. But it was already
mentioned by Ang and Chua in 1979 and even by Bawa in 1975.
7
Kaplan and Knowles (2004) introduce a measure named Kappa of order κ which is the same as Sortino-Satchell ratio.
8
It was rediscovered by Martin et al. (2003) under the name STARR (Stable Tail Adjusted Return Ratio).
9
It is an intermediary measure between Sharpe / Sortino ratio and the Omega, which is presented later in this paper.
10
Kestner [1996] is often mentioned as the originator of this ratio, but in fact it seems that he is the first who mentions it in
a paper. The ratio was initially attributed to Sterling Jones, but we did not find a paper of this author describing this ratio.
11
Historically, Jensen’s alpha is the first benchmark-based measure.
12
Ang and Chua [1979] had the same idea to generalize Jensen’s alpha by inclusion of the skewness in the model.
13
This category represents a hybrid between standardized risk-adjusted and preference-based measures.

40