Robust Performance Hypothesis Testing with the Sharpe Ratio

Robust Performance Hypothesis Testing with the Variance

Applied researchers often test for the difference of the variance of two investment strategies; in particular, when the investment strategies under consideration aim to implement the global minimum variance portfolio. A popular tool to this end is the F -test for the equality of variances. Unfortunately, this test is not valid when the returns are correlated, have tails heavier than the normal ...

The Sharpe Ratio Efficient Frontier

We evaluate the probability that an estimated Sharpe ratio exceeds a given threshold in presence of non-Normal returns. We show that this new uncertainty-adjusted investment skill metric (called Probabilistic Sharpe ratio, or PSR) has a number of important applications: First, it allows us to establish the track record length needed for rejecting the hypothesis that a measured Sharpe ratio is b...

The Sharpe Ratio Indifference Curve

Notes on the Sharpe ratio

Herein is an incomplete collection of facts about the Sharpe ratio, and the Sharpe ratio of the Markowitz portfolio. Connections between the Sharpe ratio and the t-test, and between the Markowitz portfolio and the Hotelling T 2 statistic are explored. Many classical results for testing means can be easily translated into tests on assets and portfolios. A ‘unified’ framework is described which c...

Sharpe Ratio Practice Note