NOT THE SHARPEST TOOL IN THE BOX: A quantitative study of the reliability of the Sharpe ratio in a Bear market
Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Our thesis was conducted through quantitative research on the validity of the Sharpe ratio as a performance measure in bear market conditions. Previous research had identified problems with mismatches in ranking due to Sharpe ratios rewarding unsystematic risk in funds. Alternative Sharpe ratios have been developed to solve this problem; Scholz (2006) developed the Normalized Sharpe ratio, which he argued to be a more valid performance measure in bear market conditions. We conducted a comparative analysis between rankings of the Sharpe ratio and Scholz Normalized Sharpe ratio to find out whether the Sharpe ratio provides mismatches in ranking due to rewarding unsystematic risk. The research was conducted on Swedish premium pension funds within the Swedish Pension system. We aimed to highlight the potential problems with interpreting the Sharpe ratio in bear market periods. Various models and theories was utilized to support our research question and attempt to link them to our quantitative analysis. The results from our analysis showed us that there were mismatches between the different ratios, additionally our findings provided support to previous researchers’ conclusions which stated that the Sharpe ratio rewards unsystematic risk.
Place, publisher, year, edition, pages
2010. , 56 p.
Sharpe ratio, PPM system, Normalized Sharpe ratio, Risk
IdentifiersURN: urn:nbn:se:umu:diva-38537OAI: oai:DiVA.org:umu-38537DiVA: diva2:379322
UppsokSocial and Behavioural Science, Law
Nilsson, Kerstin, Studierektor