Chapter 10. On the Foundation of Performance Measures Under Asymmetric Returns
Christian S. Pedersen and Stephen E. Satchell
Executive Summary
We examine two performance measures advocated for asymmetric return distributions: the Sortino ratio—originally introduced by Sortino and Price (1994)—and a measure based on power utility introduced in Leland (1999). In particular, we investigate the role of the Maximum Principle in this context, and assess the conditions under which the measures satisfy it. Our results add further motivation for the use of a modified Sortino Ratio, by placing it on a sound theoretical foundation. In this light, we discuss its relative merits compared with alternative approaches.
JEL Classification: G00, G11, G12
Keywords: ...
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