The Dutch Triangle

Sortino, Frank A.; Meer, Robert van der; Plantinga, Auke

doi:10.3905/jpm.1999.319775

Cited by 180 publications

(68 citation statements)

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“…But as the Sharpe ratio only considers the first two moments of returns, portfolios characterized by positively skewed returns may be misdiagnosed in terms of real performance. This proposition is confirmed with the use of Upside Potential Ratio (UPR) proposed by Sortino et al (1999). For example, when the UPR measure that captures the asymmetric nature of returns was employed the "SD L10-20" strategy again was ranked as the best one.…”

Section: Resultssupporting

confidence: 58%

Omega-optimized portfolios: applying stochastic dominance criterion for the selection of the threshold return

Vilkancas

2016

Trends Economics and Management

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Purpose of the article: While using asymmetric risk-return measures an important role is played by selection of the investor's required or threshold rate of return. The scientific literature usually states that every investor should define this rate according to their degree of risk aversion. In this paper, it is attempted to look at the problem from a different perspective -empirical research is aimed at determining the influence of the threshold rate of return on the portfolio characteristics. Methodology/methods: In order to determine the threshold rate of return a stochastic dominance criterion was used. The results are verified using the commonly applied method of backtesting. Scientific aim: The aim of this paper is to propose a method allowing selecting the threshold rate of return reliably and objectively. Findings: Empirical research confirms that stochastic dominance criteria can be successfully applied to determine the rate of return preferred by the investor. Conclusions: A risk-free investment rate or simply a zero rate of return commonly used in practice is often justified neither by theoretical nor empirical studies. This work suggests determining the threshold rate of return by applying the stochastic dominance criterion.

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Section: Resultssupporting

confidence: 58%

Omega-optimized portfolios: applying stochastic dominance criterion for the selection of the threshold return

Vilkancas

2016

Trends Economics and Management

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“…The square root of this expression, sometimes called 'downside deviation', is used as the risk function in several performance measures like the Sortino and the Upside Potential ratio (Sortino et al, 1999).…”

Section: Partial Momentsmentioning

confidence: 99%

Risk–reward optimisation for long-run investors: an empirical analysis

Gilli

Schumann²

2011

Eur. Actuar. J.

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This is a draft version and must not be quoted. Comments are very welcome.A common approach in portfolio selection is to characterise a portfolio of assets by a desired property, the 'reward', and something undesirable, the risk. These properties are often identified with mean and variance of returns, respectively, even though, given the non-Gaussian nature of financial time series, alternative specifications like partial and conditional moments, quantiles, and drawdowns seem theoretically more appropriate. We analyse the empirical performance of portfolios selected by optimising riskreward ratios constructed from such alternative functions. We find that in many cases these portfolios outperform our benchmark (minimum-variance), in particular when long-run returns are concerned. We also find, however, that all the strategies tested (including minimum-variance) are sensitive to relatively small changes in the data. The main theme throughout our analysis is that minimising risk, as opposed to maximising reward, leads to good out-of-sample performance. Adding a reward-function to the selection criterion usually improves a given strategy only marginally.

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“…Two of these, namely the Treynor ratio E(r) − r f /β and Jensen's alpha E(r) − r f − β r m − r f require a more or less explicit CAPM reference. Of those that do not, the Sortino and Kappa 3 ratios (Kaplan and Knowles, 2004;Sortino et al, 1999) have a point of connection in that in drawing on lower and upper conditional partial moments. Given a threshold return z, the lower partial moments of order n with the corresponding threshold return z are defined (c.f.…”

Section: Other Performance Metricsmentioning

confidence: 99%

Asymmetry and Performance Metrics for Equity Returns

2016

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An assumption of symmetric asset returns, together with globally risk averse utility functions, is unappealing for fund managers and other activist investors, whose preferences switch between risk aversion on the downside and risk seeking on the upside. A performance return criterion is originated that is more consistent with the implicit Friedman-Savage utility ordering. Adapted from recent developments in the income distribution literature, the proposed metric weights the lower versus upper conditional expected returns, while a dual spread or dispersion metric also exists. The resulting performance metric is easy to compute. A point of departure is the conventional Sharpe performance ratio, with the empirical comparisons extending to a range of existing performance criteria. In contrast, the proposed W-metric results in different and more embracing performance rankings.

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The Dutch Triangle

Cited by 180 publications

References 0 publications

Omega-optimized portfolios: applying stochastic dominance criterion for the selection of the threshold return

Omega-optimized portfolios: applying stochastic dominance criterion for the selection of the threshold return

Risk–reward optimisation for long-run investors: an empirical analysis

Asymmetry and Performance Metrics for Equity Returns

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