Adjusted Sharpe Ratio: Some Caveats

Didier Maillard (1)

1 LIRSA - Laboratoire interdisciplinaire de recherche en sciences de l'action

Researchers and investors are concerned with the shortcomings of various measures of portfolio management performances, among them the famous Sharpe ratio. In particular, the Sharpe ratio does not give due consideration to tail risk: negative skewness and fat tails, which justly are a matter of concern for investors. Various ways of correcting the Sharpe ratio have been proposed and continue to be proposed. One of them is the concept of Adjusted Sharpe Ratio (ASR) which gives a performance measure easy to compute from the basic statistics of returns. The aim of this paper is to trace back the derivation of this formula and stress the assumptions and approximations needed for obtaining it. Those caveats should be kept in mind when using the ASR.

Mots clés: Sharpe ratio; performance measures; tail risk JEL Classification: C10; G11; G17

Domaines: Sciences de l'Homme et Société; Mathématiques [math]

Didier Maillard. Adjusted Sharpe Ratio: Some Caveats. 2020. ⟨hal-02989173⟩