Computation of the marginal contribution of Sharpe ratio and other performance ratios

Eric Benhamou (1, 2) , Beatrice Guez

1 MILES - Machine Intelligence and Learning Systems
2 LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision

Computing incremental contribution of performance ratios like Sharpe, Treynor, Calmar or Sterling ratios is of paramount importance for asset managers. Leveraging Euler's homogeneous function theorem, we are able to prove that these performance ratios are indeed a linear combination of individual modified performance ratios. This allows not only deriving a condition for a new asset to provide incremental performance for the portfolio but also to identify the key drivers of these performance ratios. We provide various numerical examples of this performance ratio decomposition.

Mots clés: portfolio analysis; recovery and incremental Sharpe ratio; Treynor; Sharpe; Marginal contribution

Domaines: Sciences de l'Homme et Société; Economies et finances; Mathématiques [math]

Eric Benhamou, Beatrice Guez. Computation of the marginal contribution of Sharpe ratio and other performance ratios. 2021. ⟨hal-03189299v2⟩