Discussion Paper

No. 2009-54 | December 11, 2009
Different Risk-Adjusted Fund Performance Measures: A Comparison

Abstract

Traditional risk-adjusted performance measures, such as the Sharpe ratio, the Treynor index or Jensen’s alpha, based on the mean-variance framework, are widely used to rank mutual funds. However, performance measures that consider risk by taking into account only losses, such as Value-at-Risk (VaR), would be more appropriate. Standard VaR assumes that returns are normally distributed, though they usually present skewness and kurtosis. In this paper we compare these different measures of risk: traditional ones vs. ones that take into account fat tails and asymmetry, such as those based on the Cornish-Fisher expansion and on the extreme value theory. Moreover, we construct a performance index similar to the Sharpe ratio using these VaR-based risk measures. We then use these measures to compare the rating of a set of mutual funds, assessing the different measures’ usefulness under the Basel II risk management framework.

JEL Classification

G10 G11 G20

Cite As

Pilar Grau-Carles, Jorge Sainz, Javier Otamendi, and Luis Miguel Doncel (2009). Different Risk-Adjusted Fund Performance Measures: A Comparison. Economics Discussion Papers, No 2009-54, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2009-54

Assessment



Comments and Questions


Anonymous - Referee Report 1
January 11, 2010 - 14:24

See attached file


Anonymous - Referee Report 2
January 15, 2010 - 10:40

See attached file


Anonymous - Comment
February 19, 2010 - 13:41

See attached file


Anonymous - Referee Report 3
February 24, 2010 - 09:54

See attached file