Acta Univ. Agric. Silvic. Mendelianae Brun. 2015, 63(6), 1969-1977 | DOI: 10.11118/actaun201563061969

Application of Performance Ratios in Portfolio Optimization

Aleš Kresta
Department of Finance, Faculty of Economics, VŠB - Technical University of Ostrava, 17. listopadu 15/2172, 708 33 Ostrava-Poruba, Czech Republic

The cornerstone of modern portfolio theory was established by pioneer work of Harry Markowitz. Based on his mean-variance framework, Sharpe formulated his well-known Sharpe ratio aiming to measure the performance of mutual funds. The contemporary development in computer's computational power allowed to apply more complex performance ratios, which take into account also higher moments of return probability distribution. Although these ratios were proposed to help the investors to improve the results of portfolio optimization, we empirically demonstrated in our paper that this may not necessarily be true. On the historical dataset of DJIA components we empirically showed that both Sharpe ratio and MAD ratio outperformed Rachev ratio. However, for Rachev ratio we assumed only one level of parameters value. Different set-ups of parameters may provide different results and thus further analysis is certainly required.

Keywords: portfolio optimization, Sharpe ratio, mean absolute deviation ratio, Rachev ratio, efficient market hypothesis, time series modelling, GARCH model, copula function
Grants and funding:

The paper was written with the support of Operational Programme Education for Competitiveness - project no. CZ.1.07/2.3.00/20.0296 and GA ČR (Czech Science Foundation - Grantová Agentura České Republiky) under the project No. 13-18300P. All the support is greatly acknowledged and appreciated.

Prepublished online: December 26, 2015; Published: January 1, 2016  Show citation

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Kresta, A. (2015). Application of Performance Ratios in Portfolio Optimization. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 63(6), 1969-1977. doi: 10.11118/actaun201563061969
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