Roll, Richard and Levy, Moshe (2022) The Shrinkage Adjusted Sharpe Ratio: An Improved Method for Mutual Fund Selection. Social Science Working Paper, 1464. California Institute of Technology , Pasadena, CA. (Unpublished) https://resolver.caltech.edu/CaltechAUTHORS:20220415-224757554
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Abstract
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 5 times heavier than sample returns.
Item Type: | Report or Paper (Working Paper) |
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Group: | Social Science Working Papers |
Subject Keywords: | Mutual funds, Sharpe ratio, shrinkage, management fees, investment performance, alpha |
Series Name: | Social Science Working Paper |
Issue or Number: | 1464 |
Classification Code: | JEL Code: G11 |
DOI: | 10.7907/dp22-zz84 |
Record Number: | CaltechAUTHORS:20220415-224757554 |
Persistent URL: | https://resolver.caltech.edu/CaltechAUTHORS:20220415-224757554 |
Usage Policy: | No commercial reproduction, distribution, display or performance rights in this work are provided. |
ID Code: | 114355 |
Collection: | CaltechAUTHORS |
Deposited By: | Kapauhi Stibbard |
Deposited On: | 15 Apr 2022 23:28 |
Last Modified: | 15 Apr 2022 23:28 |
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