Leeds School of Business
University of Colorado
995 Regent Dr.
Boulder, CO 80302
Institutional Affiliation: University of Colorado, Boulder
NBER Working Papers and Publications
|October 2013||A Sharper Ratio: A General Measure for Correctly Ranking Non-Normal Investment Risks|
with Kent Smetters: w19500
While the Sharpe ratio is still the dominant measure for ranking risky assets, a substantial effort has been made over the past three decades to find a way to account for non-Normally distributed risks. This paper derives a generalized ranking measure which, under a regularity condition, correctly ranks risks relative to the original investor problem for a broad probability space. Moreover, like the Sharpe ratio, the generalized measure maintains wealth separation for the broad HARA utility class. Besides being effective in the presence of "fat tails," the generalized measure is also a foundation for multi-asset class portfolio optimization due to its ability to pairwise rank two risks following two different probability distributions. This paper also explores the theoretical foundations o...