Published April 15, 2022
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The Shrinkage Adjusted Sharpe Ratio: An Improved Method for Mutual Fund Selection
- Creators
- Roll, Richard
- Levy, Moshe
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.
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Additional details
- Eprint ID
- 114355
- Resolver ID
- CaltechAUTHORS:20220415-224757554
- Created
-
2022-04-15Created from EPrint's datestamp field
- Updated
-
2022-04-15Created from EPrint's last_modified field
- Caltech groups
- Social Science Working Papers
- Series Name
- Social Science Working Paper
- Series Volume or Issue Number
- 1464