Annex

1 Introduction
General variables:
R
p
is the average return of the portfolio

p
is the standard deviation of the portfolio
Skew
p
is its skewness
Kurt
p
is its excess kurtosis

p
is its systematic risk
R
m
is the return of the market portfolio

m
is the standard deviation of the market portfolio
Skew
m
is the skewness of the market portfolio
Kurt
m
is the kurtosis of the market portfolio

p
is the sensibility of the portfolio to the market portfolio

p
is the coskewness of the portfolio to the market portfolio
R
f
is the risk-free rate
R
L
is the reserve return
R
B
is the return of a benchmark

B
is the standard deviation of the return of a benchmark
V
p,0
is the initial value of the portfolio
When decomposing the observed period in sub-periods:
T is the number of sub-periods
R
p,t
is the average return of the portfolio during sub-period t
R
f,t
is the risk-free rate during sub-period t
R
L,t
is the reserve return during sub-period t
SV (R
p,L
) is the semi-variance of return R
p
relative to R
L
:
SV(R
p,L
) =
T
t=1
min(R
p,t
R
L,t
, 0)
2
T
1
When decomposing the portfolio in its assets components:
K is the number of dierent components
w
k
is the weight of the k
th
asset during the whole period
w
k,t
is the weight of the k
th
asset during the sub-period t
R
k,t
is the return of asset k during the sub-period t
R
B,t
is the return of the benchmark during the sub-period t
R
f,t
is the risk-free rate during the sub-period t
Regarding VaR and CVaR:
V aR
(X) = inf [x : Pr(X > x) 1 ]

CV aR
(X) = E [max(x, 0)| x V aR
(X)]
2 A general typology
2
3 Ratios performance / risk
3.1 Absolute risk
3.1.1 Sharpe and similar ratios
Sharpe ratio
S
p
=
R
p
R
f
p
(3.1.1.1)
Reference: Sharpe (1966)
Israelsens modied Sharpe ratio
S
I,p
=
R
p
R
f
(R
p
R
f
)/|R
p
R
f
|
p
(3.1.1.2)
Reference: Israelsen (2005)
Double Sharpe ratio
DS
p
=
S
p
(S
p
)
(3.1.1.3)
where S
p
is the Sharpe ratio (3.1.1.1).
Reference: Vinod and Morey (2001)
Adjusted for Skewness Sharpe Ratio (ASSR)
ASSR
p
= S
p
_
1 +b
3
Skew
p
3
S
p
(3.1.1.4)
where
S
p
is the Sharpe ratio (3.1.1.1)
b
3
is the investors relative preference to the skewness of the distribution
Reference: Zakamouline and Koekebakker (2008)
3
Adjusted for Skewness and Kurtosis Sharpe Ratio (ASKSR)
ASKSR
p
=
_
2
_
( R
f
)
_

_
2
(
)
2
__
(3.1.1.5)
where
= 3
_
3Kurt
p
4Skew
2
p
9
2
p
(3Kurt
p
5Skew
2
p
9)
=
3S
p
(3Kurt
p
5Skew
2
p
9)
= R
p

3Skew
p
p
3Kurt
p
4Skew
2
p
9
= 3
p
_
3Kurt
p
5Skew
2
p
9
3Kurt
p
4Skew
2
p
9
=
_
= +
( R
p
)
_
2
+ ( R
p
)
2
Reference: Zakamouline and Koekebakker (2008)
Sharpe + Skewness / Kurtosis
S
SK,p
= S
p
+
Skew
p
Kurt
p
(3.1.1.6)
where S
p
is the Sharpe ratio (3.1.1.1).
Reference: Watanabe (2006)
Adjusted Sharpe ratio (ASR)
ASR
p
=
R
B
R
f
B
+
(1 +R
f
)(1 )
B
(3.1.1.7)
where =
1
T
T
t=1
f(1 +

R
p,t
)
1 +R
f
is the actual value of the average return adjusted to the risk of a function
f, which is dened so: f is a function that transform the payo so that its
distribution will match that of the benchmark B.
Reference: Mahdavi (2004)
4
Sharpe ratio adapted to autocorrelation
S
q,p
=
q
q + 2
q1
i=1
(q i)
S
p
(3.1.1.8)
where
S
p
q is the degree of autocorrelation of the returns
Reference: Lo (2002)
Roys measure
Roy
p
=
R
p
R
L
p
(3.1.1.9)
Reference: Roy (1952)
3.1.2 Other absolute risk measures
3.1.2.1 Half- and semi-variance
Reward to half-variance index
S
H,p
=
R
p
R
f
_
HV (R
p
)
(3.1.2.1.1)
where HV (R
p
) =
T
t=1
min(R
p,t
R
p
, O)
2
T 1
Reference: Ang and Chua (1979)
Downside-risk Sharpe ratio
S
D,p
=
R
p
R
f
_
2DV (R
p
)
(3.1.2.1.2)
where the downside variance DV (R
p
) is given by:
DV (R
p
) =
T
t=1
min(R
p,t
, O)
2
T 1
Reference: Ziemba (2005)
5
Sortino ratio
Sortino
p
=
R
p
R
L
_
SV (R
p,L
)
(3.1.2.1.3)
References: Bawa (1975), Ang and Chua (1979), Sortino and Van der Meer
(1991).
Sortino + Skewness / Kurtosis
Sortino
SK,p
= Sortino
p
+
Skew
p
Kurt
p
(3.1.2.1.4)
where Sortino
p
is the Sortino ratio (3.1.2.1.3).
Sortino-Satchell ratio or Kappa coecient of order q
Sortino Satchell
q,p
=
R
p
R
L
q
_
LPM
q
(R
p,L
)
(3.1.2.1.5)
where
q is a parameter > 1
LPM
q
(R
p,L
) =
T
t=1
min(R
p,t
R
L
, O)
q
T 1
References: Sortino (2000), Sortino and Satchell (2001), Kaplan and Knowles
(2004)
3.1.2.2 VaR and CVaR
Sharpe ratio based on the Value at Risk
Sharpe
V aR
p
=
R
p
R
L
V aR
/V
p,0
(3.1.2.2.1)
Reference: Dowd (1999, 2000).
6
Sharpe ratio based on Cornish-Fisher VaR
Sharpe
C.F.V aR
p
=
R
p
R
L
V aR
,CornishFisher
/V
p,0
(3.1.2.2.2)
where
V aR
,CornishFisher
= ()
p
z() is the critical value for a threshold under normality
() = z() +
_
z()
2
1
_
Skew
p
6
+
_
z()
3
3z()
_
Kurt
p
24

_
2z()
3
5z()
_
Skew
2
p
36
References: Favre and Galeano (2002).
Sharpe ratio based on conditional VaR or STARR ratio
STARR
p
=
R
p
R
L
CV aR
/V
p,0
(3.1.2.2.3)
References: Artzner et al. (1999), Martin et al. (2003)
3.1.2.3 Miscellaneous with absolute risk
Mean absolute deviation (MAD) ratio
MAD
p
=
R
p
R
f
T
t=1
1
T
|R
p,t
R
p
|
(3.1.2.3.1)
Reference: Konno and Yamazaki (1991)
Gini ratio
Gini
p
=
R
p
R
f
Gini(R
p
R
f
)
(3.1.2.3.2)
where
Gini(R
p
R
f
) =
1
T(T 1)
T
t=1
T
s=t+1
(R
p
R
f
)
s
(R
p
R
f
)
t
Reference: Yitzhaki (1982)

Minimax
Minimax =
R
p
R
f
MM(R
p
, R
f
)
(3.1.2.3.3)
where MM(R
p
, R
f
) = max
t=1...T
(R
f,t
R
p,t
)
Reference: Young (1998)
7
Martin ratio or Ulcer performance index
Martin
p
=
R
p
R
f
UI
p
(3.1.2.3.4)
where UI
p
is the Ulcer index is the quadratic mean of the percentage drops
in value during the observed period, computed as:
UI
p
=
_
D
2
1
+D
2
2
+... +D
2
T
T
with:
D
i
= 100
R
p,i
max
t=1...T
R
p,t
max
t=1...T
R
p,t
Reference: Martin and Mc Cann (1989)
Sharpe-Omega
Sharpe Omega
p
=
R
p
R
L
P
p
(R
L
)
(3.1.2.3.5)
where P
p
(R
L
) is the value of a put option on the return of the portfolio p,
having strike R
L
.
References: Kazemi, Schneeweis and Gupta (2004)
Stable ratio
p
=
R
p
R
f
q,p
(3.1.2.3.6)
where
q,p
is the stable risk measure given by

w
Qw, w being the factor

of the weights and Q = [q
ij
] the dispersion matrix estimated with the following
formulas:
q
ij
=
_
q
jj
A(1)
1
T
T
t=1
R
i,t
sgn(

R
j,t
)
q
jj
=
_
A(p)
1
T
T
t=1
R
j,t
p
_
2/p

R
j,t
is the t
th
centered observation of j
th
excess return:
R
j,t
= R
j,t
R
f,t
(R
j
R
f
)
A(p) =
(1 p/2)
2
p
(
1+p
2
)(1 p/)
p [0, ] is computed in order to minimize the rate of convergence of asset
return series
8
=
1
K
K
k=1
k
is the index of stability of return vector

k
is the index of stability of the k
th
asset estimated during a maximum
likelihood estimator
Reference: Rachev and Mittnik (2000)
3.1.3 Ratio of gain and shortfall aversion
3.1.3.1 Classical measures of loss
Bernardo-Ledoit gain loss ratio, or Omega
BL
p
=
p
=
(R
+
p
)
(R
p
)
=
T
t=1
max(0, R
p,t
R
L
)
T
t=1
max(0, R
L
R
p,t
)
(3.1.3.1.1)
Reference: Bernardo and Ledoit (2000), Shadwick and Keating (2002).
Upside potential ratio
UPR
p
=
1
T
T
t=1
max(0, R
p,t
R
L
)
1
T
T
t=1
min(0, (R
p,t
R
L
)
2
)
(3.1.3.1.2)
Reference: Sortino et al. (1999)
Farinelli-Tibiletti ratio
r,s
p
=
r
1
T
T
t=1
max(0, (R
p,t
R
L
)
r
)
s
1
T
T
t=1
min(0, (R
p,t
R
L
)
s
)
(3.1.3.1.3)
Reference: Farinelli and Tibiletti (2008)
3.1.3.2 CVaR as measure of loss
9
Rachev ratio
R
p
=
CV aR
1
(R
f
R
p
)
CV aR
1
(R
p
R
f
)
(3.1.3.2.1)
Reference: Biglova et al. (2004)
Rachev generalized ratio
R
G,p
=
[CV aR
1
(R
f
R
p
)
]
1
[CV aR
1
(R
p
R
f
)
]
1
(3.1.3.2.2)
Reference: Biglova et al. (2004)
3.1.3.3 Maximum drawdown as measure of loss
Calmar ratio
Calmar
p
=
R
p
ml
[0,T]
(3.1.3.3.1)
where ml
[0,T]
is the maximum loss on the observed period [0, T].
Reference: Young (1991)
Sterling ratio
Sterling
p
=
R
p
ml
[0,T]
+ 0.10
(3.1.3.3.2)
where ml
[0,T]
is the average loss on the observed period [0, T].
Reference: Kestner (1996)
Sterling-Calmar ratio
Sterling Calmar
p,n
=
R
p
ml
[0,T],n
(3.1.3.3.3)
where ml
[0,T],n
is the average of the n maximum losses on the observed
period [0, T].
Burke ratio
Burke
p
=
R
p
n=1
ml
2
[0,T],i
(3.1.3.3.4)
where ml
[0,T],i
are the N largest losses on the observed period [0, T].
Reference: Burke (1994)
10
3.2 Systematic risk
3.2.1 Treynor ratio and variants
Treynor ratio
T
p
=
R
p
R
f
p
(3.2.1.1)
Reference: Treynor (1965)
Treynor ratio based on lower partial moments
T
p
=
R
p
R
f
lpm,p
(3.2.1.2)
where the mean lower partial moments systematic risk
lpm,p
is dened as:
lpm,p
=
CLPM
2
(R
L
; R
p
; R
m
)
LPM
2
(R
L
; R
m
)
CLPM
2
(R
L
; R
p
; R
f
), which denotes the second-order lower partial co-moment
between the portfolio and the market returns about the targets R
f
and R
L
, is
dened as:
CLPM
2
(R
L
; R
p
; R
m
) =
R
L
_
(R
m
R
L
)(R
p
R
f
)f(R
p
, R
m
)dR
LPM
2
(R
L
; R
p
; R
m
), which denotes the second-order lower partial moment
of the market returns about the targets R
f
and R
L
, is dened as:
LPM
2
(R
L
; R
m
) =
R
L
_
(R
m
R
L
)(R
m
R
f
)f(R
m
)dR
where f(R
p
, R
m
) is the joint probability density function of portfolio and
market returns, and f(R
m
) is the marginal probability density function of mar-
ket portfolio returns.
new,p
= W
p
lpm,p
+ (1 W
p
p
)
W
p
being a weight whose computation is described in the reference paper.
Reference: Srivastava and Essayyad (1994)
3.2.2 Black-Treynor ratio and generalization
Black-Treynor ratio
T
p
=

p
p
=
(R
p
R
f
)
p
(R
m
R
f
)
p
(3.2.2.1)
Reference: Treynor and Black (1973)
11
Generalized Black-Treynor ratio
T
g,p
=

p
J
j=1
p,j
j
/
J
j=1
B,j
j
(3.2.2.2)
where

p
and
p,j
are obtained by regression of the econometric model:
R
p,t
R
f
=
p,t
+
J
j=1
p,j,t
j,t
+
p,t

B,j
are obtained by regression of the econometric model:
R
B,t
R
f
=
J
j=1
B,j,t
j,t
+
B,t
Reference: H ubner (2005)
3.3 Non systematic risk
3.3.1 Moses, Cheney and Veits measure
I
MCV,p
=

p
(R
m
R
f
)
p
(3.3.1.1)
where
p
=

p
p
Reference: Moses, Cheney and Veit (1987)
3.3.2 Information ratio and variations
Information ratio
IR
p
=
ER
p
(ER
p
)
(3.3.2.1)
where
ER
p,t
is the tracking error given by ER
p,t
= R
p,t
R
B,t
ER
p
is its average computed as
1
T
T
t=1
(R
p,t
R
B,t
)
(ER
p
) is its variance given by
_
1
T 1
T
t=1
(ER
p,t
ER
p
)
2
Reference: Grinold (1989)
12
Israelsens modied information ratio
IR
p
=
ER
p
(ER
p
)
R
p
R
f
|
R
p
R
f |
(3.3.2.2)
Reference: Israelsen (2005)
Information ratio based on semi-variance
IR
sv,p
=
ER
p
_
SV (ER
p
)
(3.3.2.3)
where the semi-variance is given by
(ER
p
) =
_
1
T 1
T
t=1
min(ER
p,t
ER
p
, 0)
2
Reference: Gillet and Moussavou (2000)
13
4 Incremental return
4.1 Incremental return versus market
4.1.1 Analytic measures
M
2
index, or risk-adjusted performance (RAP)
M
2
p
=

m
p
(R
p
R
f
) +R
f
(4.1.1.1)
Reference: Modigliani and Modigliani (1997)
Market risk-adjusted performance (MRAP)
MRAP
p
=
1
p
(R
p
R
f
) +R
f
(4.1.1.2)
Reference: Scholtz and Wilkens (2005)
Dierential return based on RAP
DR
RAP
p
= RAP
p
R
m
(4.1.1.3)
where RAP
p
is the M
2
measure of the portfolio (4.1.1.1)
Reference: Scholtz and Wilkens (2005)
Style risk-adjusted performance measure (SRAP)
SRAP
p
= RAP
p
RAP
SB
(4.1.1.4)
where RAP
p
is the M
2
of portfolio (4.1.1.1) and RAP
SB
is the same measure
for a style benchmark representing the style of the portfolio
Reference: Lobosco (1999)
Excess standard deviation adjusted return (eSDAR)
eSDAR
p
= R
f
+

M
p
(R
p
R
f
) R
M
(4.1.1.5)
Reference: Statman (1987)
14
Aftalion and Poncets index
AP
p
= (R
p
R
B
) PR(
p

B
) (4.1.1.6)
where PR is the price of the risk.
Reference: Aftalion and Poncet (1991)
4.1.2 Ecient frontier based measures
4.2 Incremental return versus benchmark
4.2.1 One-factor model
4.2.1.1 Jensen alpha
p
= (R
p
R
f
)
p
(R
m
R
f
) (4.2.1.1.1)
Reference: Jensen (1968)
4.2.1.2 Extensions of Jensen alpha
Standardized alpha
t
,p
=

p
(
p
)
(4.2.1.2.1)
Alpha with Blacks zero-beta model
p
= (R
p
R
Z
)
p
(R
m
R
Z
) (4.2.1.2.2)
where R
Z
is the return of an asset having a beta of zero
Reference: Black (1972)
Alpha with Brenmans model taking taxes into account
p
= (R
p
R
f
) [
p
(R
m
R
f
) T(D
M
R
f
)] T(D
p
R
f
) (4.2.1.2.3)
where
T
d
is the average taxation rate for dividends
T
g
is the average taxation rate for capital gains
15
T =
T
d
T
g
1 T
g
D
M
is the dividend yield of the market portfolio
D
p
is the weighted sum of the dividend yields of the assets in the portfolio:
D
p
=
K
k=1
w
k
D
k
Reference: Brenman (1970)
Total risk alpha
TRA
p
= R
p
R
Bp
(4.2.1.2.4)
where R
Bp
is the return of a benchmark portfolio, that represents the market
index matched to the total risk of the portfolio:
R
Bp
= R
f
+
R
m
R
f
p
Reference: Fama (1972)
Mc Donalds measure
p
= (R
p
R
f
)
p1
(R
m1
R
f
)
p2
(R
m2
R
f
) (4.2.1.2.5)
where
w
i
is the proportion of portfolio invested in market i

pi
is the portfolios coecient of systematic risk compared to market i

pi
= w
i

pi
R
mi
is the rate of return of market i
for i = 1, 2
Reference: McDonald (1973)
Jensen alpha adjusted for stale
p
= (R
p
R
f
)
3
j=0
p,j
(R
m,j
R
f,j
) (4.2.1.2.6)
where
p,j
are lagged betas for portfolio p, R
m,j
and R
f,j
are lagged market
portfolio returns and risk-free rates.
References: Scholes and Williams (1977), Dimson (1979)
16
Leland alpha
L,p
= (R
p
R
f
)
,p
(R
m
R
f
) (4.2.1.2.7)
where

,p
=
cov (R
p
, (1 +R
m
)
)
cov (R
m
, (1 +R
m
)
)
=
ln[E(1 +R
m
)] ln(1 +R
f
)
var[ln(1 +R
m
)]
Reference: Leland (1999)
4.2.2 Multi-factors model
4.2.2.1 Alpha with multi-factor models
Generic alpha with multi-factor models
p
= (R
p
R
f
)
J
j=1
p,j
j
(4.2.2.1.1)
where

p,j
is the sensitivity of the portfolio to factor j

j
is the return for factor j
Alpha based on Fama and Frenchs three factors model
p
= (R
p
R
f
)
p
(R
m
R
f
)
p,Sml
(R
Small
R
Large
)
p,Hml
(R
Hbtm
R
Lbtm
) (4.2.2.1.2)
where
R
Small
is the return of a small capitalization portfolio
R
Large
is the return of a large capitalization portfolio
R
Hbtm
is the return of a high book-to-market portfolio
R
Lbtm
is the return of a low book-to-market portfolio
17

p,Sml
is the sensitivity of portfolio p to a portfolio long in small capital-
ization and short in Large capitalization stocks

p,Hml
is the sensitivity of portfolio p to a portfolio long in high book-to-
market and short in low book-to-market stocks
References: Fama and French (1992 and 1993)
Alpha based on Carharts four factors model
p
= (R
p
R
f
)
p
(R
m
R
f
)
p,Sml
(R
Small
R
Large
)
p,Hml
(R
Hbtm
R
Lbtm
)
p,Rpy
(R
Hrpy
R
Lrpy
) (4.2.2.1.3)
where
R
Small
R
Large
R
Hbtm
R
Lbtm
R
Hrpy
is the return of a portfolio constituted with the highest returns of
previous year
R
Lrpy
is the return of a portfolio constituted with the lowest returns of
previous year

p,Sml

p,Hml

p,Rpy
is the sensitivity of portfolio p to a portfolio long in highest returns
of previous year and short in lowest returns of previous years stocks
Reference: Carhart (1997)
18
Multi-factors alpha for hybrid funds
Hp
= (R
p
R
f
)
p
(R
m
R
f
)
p,Bnd
(R
Bnd
R
f
)
p,Sml
(R
Small
R
Large
)
p,Hml
(R
Hbtm
R
Lbtm
) (4.2.2.1.4)
where
R
Bnd
is the return of a bond index
R
Small
R
Large
is the return of a Large capitalization portfolio
R
Hbtm
R
Lbtm

p,Bnd
is the sensitivity of portfolio p to the returns of the bonds

p,Sml

p,Hml
Reference: Elton et al. (1993)
Alpha based on Barras model
B,p
= (R
p
R
f
)
13
k=1
p,k
k
(4.2.2.1.5)
Reference: Sheikh (1996)
4.2.2.2 Conditional models
Alpha with conditional betas
p
= (R
p
R
f
)
J
j=1
p,j
j,t

J
j=1
L
l=1
p,j,l
(z
l,t1
j,t
) (4.2.2.2.1)
where

p,j
19

j,t
is the return for factor j for period t
z
l,t1
is the observed value for macroeconomic variable l during period
t 1

p,j,l
is the sensibility of
p,j
to the economic factor z
l
Reference: Ferson and Schadt (1996)
Conditional alpha
l=1
p,l
z
l,t1
= (R
p
R
f
)
J
j=1
p,j
j,t
j=1
L
l=1
p,j,l
(z
l,t1
j,t
) (4.2.2.2.2)
where

p,l
is the sensitivity of to the economic factor z
l

p,j

j,t
is the return for factor j for period t
z
l,t1
is the observed value for macroeconomic variable l during period
t 1

p,j,l
is the sensibility of
p,j
to the economic factor z
l
Reference: Christopherson et al. (1999)
4.2.2.3 Extensions of CAPM based
Alpha based on Harvey and Siddiques model
p
= (R
p
R
f
)
p
(R
m
R
f
)
p,Sml
(R
Small
R
Large
)
p,Hml
(R
Hbtm
R
Lbtm
) +
p,Sks
((R
Ncsk
R
Pcsk
) (4.2.2.3.1)
where
R
Small
R
Large
R
Hbtm
20
R
Lbtm
R
Ncsk
is the return of a portfolio built with the assets having the most
negative past coskewness with the market portfolio
R
Pcsk
is the return of a portfolio built with the assets having the most
positive past coskewness with the market portfolio

p,Sml

p,Hml

p,Sks
is the sensitivity of portfolio p to a portfolio long in most negative
past coskewness and short in most positive coskewness
Reference: Harvey and Siddique (2000)
Higher moment measure of Hwang and Satchell
a
p
= (R
p
R
f
)
1
(R
m
R
f
)
2
(
p

p
) (4.2.2.3.2)
where

1
=
Skew
2
m
p
(Kurt
m
1)
p
Skew
2
m
(Kurt
m
1)

2
=
Skew
m
m
Skew
2
m
(Kurt
m
1)
Reference: Hwang and Satchell (1999)
Alpha based on a two factor CAPM
p
= (R
p
R
f
)
p
(R
m
R
f
)
p,B
e
B
(4.2.2.3.3)
where

p,B
is the beta of the portfolio related to the benchmark
e
B
is the residual of the regression from the returns of the benchmark to
those of the market
Reference: Gomez and Zapatero (2003)
21
4.3 Dierence between gain and shortfall aversion
4.3.1 Melnikos measure
RAR
p
= R
p
(W 1)S (4.3.1.1)
where
R
p
is the return of the portfolio
W is the weight of the gain-shortfall aversion
S is the average annual shortfall rate
Reference: Melniko (1998)
4.3.2 Sharpe alpha
p
(Sharpe) = R
p
A
i
2
p
(4.3.2.1)
where A
i
is the coecient of aversion to risk for the investor i.
Reference: Plantinga and De Groot (2001)
4.3.3 Fouses index
Fouse
p
= R
p
A
i
SV (R
L
) (4.3.3.1)
where A
i
is the coecient of aversion to risk for the investor i.
Reference: Sortino and Price (1994)
22
5 Preference based measures
5.1 Direct
5.1.1 Utility functions based
Stutzer index of convergence
Stutzer
p
= sign(r
p
)
_
2I
p
(5.1.1.1)
where
r
p,t
= R
p,t
R
L
r
c
p,t
= ln(1 +r
p,t
)
I
p
= max
_
ln
_
1
T
T
t=1
exp(r
c
p,t
)
__
Reference: Stutzer (2000)
Morningstar risk adjusted return (MRAR)
MRAR
p
=
_
T
t=1
(1 +r
p,t
)
12
1 (5.1.1.2)
where
r
p,t
is the geometric excedentary yield, given by 1 +r
p,t
=
1 +R
p,t
1 +R
f
the periods t = 1...T are monthly
1 + is the relative aversion to risk coecient
Reference: Morningstar (2007)
Alternative investments risk adjusted performance (AIRAP)
AIRAP
p
=
_
T
t=1
R
p,t
_
12
1 (5.1.1.3)
where is a parameter specic to the investor expressing his aversion to risk
Reference: Sharma (2004)
23
Manipulation-proof performance measure
p
=
1
(1 )t
ln
_
1
T
T
t=1
_
1 +r
p,t
1 +r
f,t
_
1
_
(5.1.1.4)
where
t is the length of time between observations
is a coecient selected to make holding the benchmark optimal for an
uninformed manager
Reference: Ingersoll et al. (2007)
5.1.2 Miscellaneous
Investor specic performance measure
ISM
p
= w
D
_
D
+R
f
m
S
p
_2
2(1 w
D
)
D
+ R
f
TR
p
(5.1.2.1)
where
w
D
is the fraction of the portfolio invested for w
i
in an asset i and 1 w
i
in the risk-free asset

D
+ =

G
+
p
w
D
+
p

G
+ = w
D
[w
i
R
i
+ (1 w
p
)R
f
] + (1 w
D
)R
p
S
p
T
p
is the Treynor ratio (3.2.1.1)
Reference: Scholz and Wilkens (2004)
Muralidhars measure or M
3
M
3
p
= a
p
+b
B
+ (1 a b)R
f
(5.1.2.2)
where

p,B
is the correlation between the portfolio and the benchmark
24

T,B
is the target correlation between the portfolio and the benchmark:
T,B
= 1
TE
2
p,B
2
2
B
a =

B
1
2
T,B
1
2
p,B
b =
T,B
a

p
p,B
Reference: Muralidhar (2000, 2001)
Skill, history and risk-adjusted measure
SHARAP
p
= C(S
p
)R(CAP
p
) (5.1.2.3)
where
C(S
p
) is the cumulative probability of a unit normal with standard devi-
ation S
p
for portfolio p
R(CAP
p
) is the M
3
measure for portfolio p
Reference: Muralidhar (2002)
5.1.3 Prospect theory based
Prospect ratio
ProspectRatio
p
=
1
T
T
t=1
(max(R
p,t
, 0) 2.25(min(R
p,t
, 0))) R
L
SV(R
p,L
(5.1.3.1)
where
D
is the downside risk:
_
T
t=1
min((R
p,t
R
L,t
), 0)
2
Reference: Khaneman and Tversky (1979)
Prospect + Skewness / Kurtosis
Prospect
SK,p
= ProspectRatio
p
+
Skew
p
Kurt
p
(5.1.3.2)
where Prospect
R
atio
p
is the prospect ratio (5.1.3.1).
25
5.2 Indirect
5.2.1 Cohen, Coval and Pastors measure based on levels of holding
p
=
K
k=1
w
p,k
k
(5.2.1.1)
where

k
=
K
j=1
v
j,k
j
v
j,k
=
w
p,j
K
i=1
v
i,k
Reference: Cohen et al. (2005)
5.2.2 Cohen, Coval and Pastors measure based on changes in hold-
ing
p
=

+
p

p
(5.2.2.1)
where
+
p
=
nN
+
p
x
+
p,n
p
=
nN
p
x
p,n
n
d
p,n
= w
n,t
w
n,t1
1 +r
n,t
1 +R
p,t
is the dierence between the current weight
and the weight obtained if the portfolio p neither bought nor sold any of
the stock n over the past period
Sets are:
N
+
p
= {n : d
p,n
> 0} is the set of assets n purchased by portfolio p between
t 1 and t
N
p
= {n : d
p,n
< 0} is the set of assets n sold by portfolio p between t 1
and t
M
+
n
= {p : d
p,n
> 0} is the set of portfolios p who made net purchases of
asset n between t 1 and t
26
M
n
= {p : d
p,n
< 0} is the set of portfolios p who made net sales of asset
n between t 1 and t
Normalized change in weights are:
x
+
p,n
=
d
p,n
nN
+
p
d
p,n
is for portfolio p the fraction of purchases for asset n
x
p,n
=
d
p,n
nN
p
d
p,n
is for portfolio p the fraction of sales for asset n
y
+
p,n
=
d
p,n
pM
+
n
d
p,n
is for asset n the fraction of purchases accounted by
portfolio p
y
p,n
=
d
p,n
pM
n
d
p,n
is for asset n the fraction of sales accounted by portfolio
p
For each asset n, its quality measure is:

n
=
+
n

n
where

+
n
=
pM
+
n
y
+
p,n

m

n
=
pM
n
y
p,n

m
and
m
is the usual performance measure.
Reference: Cohen et al. (2005)
5.2.3 Daniels measures
Characteristic selectivity
CS
p,t
=
K
k=1
w
k,t1
(R
k,t
R
b
k,t1
t
) (5.2.3.1)
where R
b
k,t1
t
is the period t return of the characteristic-based passive port-
folio that is matched to stock k during period t-1.
Reference: Daniel et al. (1997)
27
Characteristic timing
CT
p,t
=
K
k=1
(w
k,t1
R
b
k,t1
t
w
k,t13
R
b
k,t13
t
) (5.2.3.2)
where R
b
k,ti
t
folio that is matched to stock k during period t i(i = 1or13).
Average selectivity
AS
p,t
=
K
k=1
w
k,t13
R
b
k,t13
t
(5.2.3.3)
where R
b
k,t13
t
folio that is matched to stock k during period t 13.
5.2.4 Conditional weight measure
CWM
t
= E[
K
j=1
( w
k,t
w
b,j,t,k
) ( r
j,t+1
E [ r
j,t+1
|Z
t
]) |Z
t
] (5.2.4.1)
where w
b,j,t,k
= w
j,tk
t
u=tk+1
1 + r
j,u
1 + r
p,u
Reference: Ferson and Khang (2002)
28
6 Market timing
6.1 Original measures
6.1.1 Treynor and Mazuys coecient
This coecient is c
p
in the following econometric model:
R
p
R
f
= a
p
+b
p
(R
m
R
f
) +c
p
(R
m
R
f
)
2
+
p
(6.1.1.1)
By extension, the Treynor-Mazuy total performance measure is given by:
TM
p
= a
p
+c
p
var(R
m
R
f
)
Reference: Treynor and Mazuy (1966)
6.1.2 Henriksson and Mertons coecient
This coecient is c
p
R
p
R
f
= a
p
+b
p
(R
m
R
f
) +c
p
(R
m
R
f
)D
p
+
p
(6.1.2.1)
where D
p
is a boolean variable whose values are 0 if R
m
> R
f
and -1 else.
Reference: Henriksson and Merton (1981)
6.1.3 Weigels coecient
This coecient is
p
R
p
R
f
=
p
+
p,b
(R
b
R
f
) +
p,s
(R
s
R
f
) +
p
Z +
p
(6.1.3.1)
where
R
b
is the return of the bond market

p,b
is the sensitivity of portfolio to the bond market
R
s
is the return of the equity market

p,s
is the sensitivity of portfolio to the equity market
Z = max[R
b
R
f
, R
s
R
f
, 0] is the perfect market-timing option

p
is the fraction of the perfect market-timing option embedded in the
managers process
Reference: Weigel (1991)
29
6.2 Extension of original measures
6.2.1 Adding a cubic term
Treynor and Mazuy extended timing measure
R
p
R
f
= a
p
+b
p
(R
m
R
f
) +c
p
(R
m
R
f
)
2
+d
p
(R
m
R
f
)
3
+
p
(6.2.1.1)
Reference: Jagannathan and Korajczyk (1986)
6.2.2 Multi-factors version
Extended Treynor and Mazuy measure
R
p
R
f
= a
p
+b
p
(R
m
R
f
) +c
p
(R
m
R
f
)
2
+d
p
(R
s
R
f
) +e
p
(R
b
R
f
) +
p
(6.2.2.1)
where
R
s
is the return of an index that covers assets which are not in the market
index
R
b
is the return of a bond index
Reference: Bello and Janjigian (1997)
Multi-factor timing measure
R
p
R
f
= a
p
+b
p,m
(R
m
R
f
)+b
p,s
(R
s
R
f
)+b
p,g
(R
g
R
f
)+b
p,v
(R
v
R
f
)
+b
p,b
(R
b
R
f
) +b
p,sb
(R
sb
R
f
) +b
p,hb
(R
hb
R
f
) +b
p,lb
(R
lb
R
f
)
+c
p,m
(R
m
R
f
)
2
+c
p,sb
(R
sb
R
f
)
2
+
p
(6.2.2.2)
where
R
s
is the return of a small stocks index
R
g
is the return of a growth stocks index
R
v
is the return of a value stocks index
R
b
is the return of a long maturity bond index
R
sb
is the return of a short maturity bond index
30
R
hb
is the return of a high quality bond index
R
lb
is the return of a low quality bond index
b
p,m
, b
p,s
, b
p,g
, b
p,v
, b
p,b
, b
p,sb
, b
p,hb
and b
p,lb
are the corresponding sys-
tematic risks of the portfolio
c
p,m
and c
p,sb
represent stock and bond timing ability
Reference: Comer (2006)
Henriksson and Merton extended measure of market timing
R
p
R
f
= a
p
+b
p,m
(R
m
R
f
)+c
p,m
(R
m
R
f
)D
p,m
+b
p,ew
(R
ew
R
f

ew
)
+c
p,ew
(R
ew
R
f

ew
)D
p,ew
+
p
(6.2.2.3)
where
R
Small
R
Big
is the return of a big capitalization portfolio
R
Hbtm
R
Lbtm
Reference: Henriksson (1984)
Henriksson and Merton timing measure in a three-factor context
R
p
R
f
= a
p
+b
p,m
(R
m
R
f
) +b
p,S
(R
Small
R
Big
) +b
p,H
(R
Hbtm
R
Lbtm
)
+d
p,m
max(0, R
m
R
f
)+d
p,S
max(0, R
Small
R
Big
)+b
p,H
max(0, R
Hbtm
R
Lbtm
)+
p
(6.2.2.4)
where
R
Small
R
Big
is the return of a big capitalization portfolio
R
Hbtm
R
Lbtm
Reference: Chan et al. (2002)
31
6.2.3 Conditional versions
Conditional Treynor and Mazuys coecient This coecient is
p
in the
following econometric model:
R
p
R
f
= a
p
+b
p
(R
m
R
f
) +B
z
t1
(R
m
R
f
) +
p
(R
m
R
f
)
2
+
p
(6.2.3.1)
where
z
t1
= Z
t1
E(Z) is a vector of deviation of the economic variables Z
from their unconditional mean
B is a vector of sensitivity of b
p
to the economic variables Z
Conditional Henriksson and Mertons coecient This coecient is
p
(6.2.3.2)
where

6.3 Period based measures
6.3.1 Grinblatt and Titman index, or positive period weighting mea-
sure
GB
p
=
T
t=1
w
t
(R
p,t
R
f,t
) (6.3.1.1)
where
w
t
0, t
t=1
w
t
= 1
t=1
w
t
(R
p,t
R
f,t
) = 0
Reference: Grinblatt and Titman (1989a and b)
32
6.3.2 Cornells measure
C
p
= r
p

p
r
B
(6.3.2.1)
where
r
p
is the probability limit of the sample mean of the portfolio return series
p
is the weighted mean of the betas used for the portfolio
r
B
is the probability limit of the sample mean of the return of the bench-
mark
Reference: Cornell (1979)
6.3.3 Performance change measure
PCM
p
=
K
k=1
T
t=1
(R
p,k,t
R
f,t
)(w
k,t
w
k,t1
)
T
(6.3.3.1)
Reference: Grinblatt and Titman (1993)
6.4 Miscellaneous
6.4.1 Performance based on pure market timing
X
p
=
1
T
T
t=1
_
s
t
R
c
1,t+1
n
2T
ln
_
1 +c
1 c
_
_
p
T
T
t=1
R
c
1,t+1
+
1 p
T
T
t=1
R
c
2,t+1
_
(6.4.1.1)
where the index 1 represent a risky asset and 2 a risk free asset. during each
period of time t, the portfolio is fully invested in 1 or 2, and:
R
c
i,t+1
is the continuous rate of return of the asset i between t and t+1
s
t
is a binary variable whose value is 1 if the portfolio is invested in the
risky asset 1 at period t, and else 0
c is the transaction cost to go from asset 1 to asset 2 or the inverse
Reference: Sweeney (1988)
33
6.4.2 Bhattacharya and Peiderer measure of market timing
R
p,t
=
p
+E(R
m
)(1 )R
m,t
+(R
m,t
)
2
+ (
t
R
m,t
+
p,t
) (6.4.2.1)
where

p
measures the managers micro forecasting ability
represents the managers response to information
is the coecient of determination between the managers forecast and
the excess return on the market: =

2
+
2
is the variance of the managers forecast error

2
is the variance of the market excess return

The managers timing ability can be found by examining the disturbance
term in the above specication. The error term can be dened as shown in:
t
=
t
R
mt
+
pt
(
t
)
2
=
2
t
(R
mt
)
2
+
t
where
t
=
2
2
(R
mt
)
2
(
2
T

2
) + (
pt
)
2
+ 2R
mt
pt
Reference: Bhattacharya and Peiderer (1983)
34

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Annex

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1 Introduction

(X) = inf [x : Pr(X > x) 1 ]

(X) = E [max(x, 0)| x V aR

Reference: Yitzhaki (1982)

Qw, w being the factor

Reference: Ferson and Schadt (1996)

is the variance of the managers forecast error

is the variance of the market excess return

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