Ruminations on Investment Performance Measurement


  • I would like to acknowledge financial support from the Ivadelle and Theodore Johnson Chair in Banking and Finance at the Marshall School of Business, University of Southern California. This EFM 2012 Symposium address collects and summarises some of the ideas in a stream of recent research, including Ferson (2010), Ferson (2010), Ferson and Lin (2010), Ferson and Mo (2010) and Aragon and Ferson (2008).


This is a summary of a keynote address to the European Financial Management Symposium on Asset Management in April 2012. It makes five observations about the state of the art in investment performance measurement. First, the traditional alphas used in performance measurement are not to be trusted as normative indicators for when to buy or sell funds, but Stochastic Discount Factor (SDF) alphas are better. Traditional alphas can be equivalent to the correct SDF alphas, but this requires that an Appropriate Benchmark be used. Third, mean variance efficient portfolios are almost never Appropriate Benchmarks. Fourth, Sharpe ratios can be justified as performance measures, if they are properly used. Finally, current holdings-based approaches to performance measurement are also flawed, but I offer some suggestions for improving them.