Journal of Statistical and Econometric Methods

Incremental Sharpe and other performance ratios

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  • Abstract

    We present a new methodology of computing incremental contribution for performance ratios for portfolio like Sharpe, Treynor, Calmar or Sterling ratios. Using Eulerís homogeneous function theorem, we are able to decompose these performance ratios as a linear combination of individual modified performance ratios. This allows understanding the drivers of these performance ratios as well as deriving a condition for a new asset to provide incremental performance for the portfolio. We provide various numerical examples of this performance ratio decomposition.

    Mathematics Subject Classification: C12; G11
    Keywords: Sharpe; Treynor; recovery; incremental Sharpe ratio; portfolio diversification