Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5090710 | Journal of Banking & Finance | 2008 | 7 Pages |
Abstract
As the assumption of normality in return distributions is relaxed, classic Sharpe ratio and its descendants become questionable tools for constructing optimal portfolios. In order to overcome the problem, asymmetrical parameter-dependent performance ratios have been recently proposed in the literature. The aim of this note is to develop an integrated decision aid system for asset allocation based on a toolkit of eleven performance ratios. A multi-period portfolio optimization up covering a fixed horizon is set up: at first, bootstrapping of asset return distributions is assessed to recover all ratios calculations; at second, optimal rebalanced-weights are achieved; at third, optimal final wealth is simulated for each ratios. Eventually, we make a robustness test on the best performance ratios. Empirical simulations confirm the weakness in forecasting of Sharpe ratio, whereas asymmetrical parameter-dependent ratios, such as the Generalized Rachev, Sortino-Satchell and Farinelli-Tibiletti ratios show satisfactorily robustness.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Simone Farinelli, Manuel Ferreira, Damiano Rossello, Markus Thoeny, Luisa Tibiletti,