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Sharpe thinking in asset ranking with one-sided measures. (English) Zbl 1161.91415
Summary: If we exclude the assumption of normality in return distributions, the classical risk-reward Sharpe Ratio becomes a questionable tool for ranking risky projects. In line with Sharpe thinking, a general risk-reward ratio suitable to compare skewed returns with respect to a benchmark is introduced. The index includes asymmetrical information on: (1) “good” volatility (above the benchmark) and “bad” volatility (below the benchmark), and (2) asymmetrical preference to bet on potential high stakes and the aversion against possible huge losses. The former goal is achieved by using one-sided volatility measures and the latter by choosing the appropriate order for the one-sided moments involved. The Omega Index and the Upside Potential Ratio follow as special cases.

91B30 Risk theory, insurance (MSC2010)
91G70 Statistical methods; risk measures
Full Text: DOI
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