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Generalized Performance Measures: Optimal Overweighing of Fees Relative to Sample Returns

Moshe Levy and Richard Roll
The Journal of Portfolio Management Winter 2018, 44 (3) 66-75; DOI: https://doi.org/10.3905/jpm.2018.44.3.066
Moshe Levy
is a professor of finance at the Hebrew University in Jerusalem, Israel
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Richard Roll
is the Linde Institute professor of finance at the California Institute of Technology in Pasadena, CA
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Abstract

Performance measures such as alpha and the Sharpe ratio are typically based on sample returns net of fees. This implies the same weighing to sample returns and to fees. However, sample return parameters are noisy estimates of true parameters, while fees are known with certainty. Thus, intuition suggests that fees should be given more weight than sample returns. The authors formalize this intuition, and derive the optimal overweighing of fees. They show that the resulting generalized performance measures are better predictors of future net performance than the standard performance measures, and they better explain future fund flows.

TOPICS: Performance measurement, statistical methods

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The Journal of Portfolio Management: 44 (3)
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Generalized Performance Measures: Optimal Overweighing of Fees Relative to Sample Returns
Moshe Levy, Richard Roll
The Journal of Portfolio Management Jan 2018, 44 (3) 66-75; DOI: 10.3905/jpm.2018.44.3.066

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Generalized Performance Measures: Optimal Overweighing of Fees Relative to Sample Returns
Moshe Levy, Richard Roll
The Journal of Portfolio Management Jan 2018, 44 (3) 66-75; DOI: 10.3905/jpm.2018.44.3.066
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