A Brief History of Sharpe Ratio, and Beyond
3 Pages Posted: 13 Dec 2017 Last revised: 16 Dec 2017
Date Written: December 9, 2017
Early in the 1950s, academics and investors started proposing in earnest a variety of summary statistics to capture in a single number the quality of an investment. Sharpe Ratio became the most commonly used, and it's an important metric, but maximizing Sharpe Ratio doesn't always maximize risk-adjusted return. In cases with a leverage constraint, optimal risk-adjusted return depends on both Sharpe Ratio and level of return.
Keywords: Decision Making under Uncertainty, Risk, Utility, Risk Aversion, Coin Flip, Heuristics, Rules of Thumb, Market Timing, Gambling, Betting, Manager Selection, Sharpe Ratio, Mutual Funds, Data Mining
JEL Classification: B12, B16, B20, C00, C10, C11, C50, C57, C73, D03, D81, D83, E00, G00, G02, G11, G12, G14, G17, G23
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