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| Tekijä: | Lo, A.W. |
| Otsikko: | The statistics of Sharpe ratios |
| Lehti: | Financial Analysts' Journal
2002 : JUL/AUG, VOL. 58:4, p. 36-52 |
| Asiasana: | Stock markets Rate of return Volatility Statistical methods USA |
| Vapaa asiasana: | Mutual funds Hedge funds |
| Kieli: | eng |
| Tiivistelmä: | The building blocks of the Sharpe ratio-expected returns and volatilities, are unknown quantities that must be estimated statistically and are, therefore, subject to estimation error. This raises the natural question: How accurately are Sharpe ratios measured? To address this question, this study derives explicit expressions for the statistical distribution of the Sharpe ratio using standard asymptotic theory under several sets of assumptions. It is shown that monthly Sharpe ratios cannot be annualized by multiplying by (square root of)12 except under very special circumstances. This study derives the correct method of conversion in the general case of stationary returns. Through an illustrative empirical example of mutual funds and hedge funds it is found that the annual Sharpe ratio for a hedge fund can be overstated by as much as 65 percent because of the presence of serial correlation in monthly returns. |
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