Adjusting for risk:: An improved Sharpe ratio |
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Institution: | 1. Department of Finance, Waikato Management School, The University of Waikato, Private Bag 3105, Hamilton 3240, New Zealand;2. SP Jain School of Global Management, Dubai Campus, United Arab Emirates;3. Lahore University of Management Sciences, Lahore, Pakistan;4. Waikato Management School, University of Waikato, Hamilton, New Zealand;1. ESSCA Grande École, France;2. University of Cyprus, Cyprus;3. Imperial College London, United Kingdom;4. University of the Aegean, Greece;1. Excelia Business School, La Rochelle, France;2. Institute of Business Administration, Karachi, Pakistan;3. Lahore University of Management Sciences, Lahore, Pakistan;4. Southampton Business School Southampton, United Kingdom |
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Abstract: | This paper proposes a new rule for risk adjustment and performance evaluation. This rule is a generalization of the well-known Sharpe ratio criterion, and under normal conditions enables a manager to correctly assess alternative risky investments. The rule is superior to existing rules such as the standard Sharpe rule and the RAROC, and can make a substantial difference in estimates of required returns. |
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