TY - JOUR
T1 - The Shrinkage Adjusted Sharpe Ratio
T2 - An Improved Method for Mutual Fund Selection
AU - Levy, Moshe
AU - Roll, Richard
N1 - Publisher Copyright:
Copyright 2022 With Intelligence LLC.
PY - 2023/2
Y1 - 2023/2
N2 - Mutual fund selection is a notoriously difficult task, because past performance is a poor predictor of future performance. We propose a fund performance measure that incorporates a simple idea: shrinkage, in the sense of Bayes-James-Stein, should be applied to gross return parameters, but not to fees, which are known. The proposed Shrinkage Adjusted Sharpe ratio (SAS) substantially improves the prediction of out-of-sample performance relative to existing methods. The best prediction is obtained when fees are weighed five times heavier than sample returns.
AB - Mutual fund selection is a notoriously difficult task, because past performance is a poor predictor of future performance. We propose a fund performance measure that incorporates a simple idea: shrinkage, in the sense of Bayes-James-Stein, should be applied to gross return parameters, but not to fees, which are known. The proposed Shrinkage Adjusted Sharpe ratio (SAS) substantially improves the prediction of out-of-sample performance relative to existing methods. The best prediction is obtained when fees are weighed five times heavier than sample returns.
UR - http://www.scopus.com/inward/record.url?scp=85153942949&partnerID=8YFLogxK
U2 - 10.3905/joi.2022.1.252
DO - 10.3905/joi.2022.1.252
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AN - SCOPUS:85153942949
SN - 1068-0896
VL - 32
SP - 7
EP - 23
JO - Journal of Investing
JF - Journal of Investing
IS - 2
ER -