Practical Risk-Adjusted Performance Measurement

Cover
Title Page
Copyright Page
Contents
Preface
Acknowledgements
About the Companion Website
Chapter 1 Introduction
	Definition of risk
	Risk types
	Risk management versus risk control
	Risk aversion
	Ex post and ex ante
	Dispersion
Chapter 2 Descriptive Statistics
	Mean (or arithmetic mean)
	Annualised return
	Continuously compounded returns (or log returns)
	Winsorised mean
	Mean absolute deviation (or mean deviation)
	Variance
	Mean difference (absolute mean difference or Gini mean difference)
	Relative mean difference
	Bessel’s correction (population or sample, n or n − 1)
	Sample variance
	Standard deviation (variability or volatility)
	Annualised risk (or time aggregation)
	The Central Limit Theorem
	Frequency and number of data points
	Alternative risk annualisation methods
	Normal (or Gaussian) distribution
	Histograms
	Skewness (Fisher\'s or moment skewness)
	Sample skewness
	Kurtosis (Pearson\'s kurtosis)
	Excess kurtosis (or Fisher\'s kurtosis)
	Sample kurtosis
	Bera–Jarque statistic (or Jarque–Bera)
	Covariance
	Sample covariance
	Correlation (ρ)
	Sample correlation
	Autocovariance
	Autocorrelation (or serial correlation)
	Annualised variability if returns are autocorrelated
Chapter 3 Performance Appraisal Measures
	Performance appraisal
	Sharpe ratio (reward to variability, Sharpe index)
	Roy ratio
	Risk‐free rate
	Alternative Sharpe ratio
	Revised Sharpe ratio
	Adjusted Sharpe ratio
	Skew‐adjusted Sharpe ratio
	Skewness–kurtosis ratio
	Alternative adjusted Sharpe ratios
	Smoothing‐adjusted Sharpe ratio
	MAD ratio
	Gini ratio
	Relative risk
	Tracking error (or tracking risk, relative risk, active risk)
	Relative skewness
	Relative kurtosis
	Information ratio
	Geometric information ratio
	Modified information ratio
	Adjusted information ratio
	Skew‐adjusted information ratio
Chapter 4 Regression Analysis
	Regression equation
	Regression alpha
	Regression beta
	Regression epsilon
	Capital asset pricing model (CAPM)
	Beta (β) (systematic risk or volatility)
	Jensen\'s alpha (Jensen\'s measure or Jensen\'s differential return or ex‐post alpha)
	Annualised alpha
	Bull beta (β+)
	Bear beta (β−)
	Beta timing ratio
	Market timing
	Systematic risk
	Correlation
	R2 (or coefficient of determination)
	Specific (or residual) risk
	The geometry of risk
	Treynor ratio (reward to volatility)
	Modified Treynor ratio
	Appraisal ratio (or Treynor–Black ratio)
	Modified Jensen
	Fama decomposition
	Selectivity
	Diversification
	Net selectivity
	Fama–French three‐factor model
	Three‐factor alpha (or Fama–French alpha)
	Carhart four‐factor model
	Four‐factor alpha (or Carhart\'s alpha)
	Types of alpha
	Multi‐factor models
Chapter 5 Drawdown
	Average drawdown
	Maximum drawdown
	Largest individual drawdown
	Recovery time (or drawdown duration)
	Drawdown deviation
	Ulcer index
	Pain index
	Calmar ratio (or Drawdown ratio)
	MAR ratio
	Sterling ratio
	Sterling−Calmar ratio
	Burke ratio
	Modified Burke ratio
	Martin ratio (or Ulcer performance index)
	Pain ratio
	Active (or relative) drawdown
Chapter 6 Partial Moments
	Downside risk (or semi‐standard deviation)
	Downside potential
	Pure downside risk
	Half variance (or semi‐variance)
	Upside risk (or upside uncertainty)
	Mean absolute moment
	Omega ratio (Ω)
	Bernardo and Ledoit (or gain–loss) ratio
	d ratio
	Omega–Sharpe ratio
	Sortino ratio
	Reward to half‐variance
	Downside risk Sharpe ratio
	Downside information ratio
	Sortino–Satchell ratio
	Kappa ratio
	Upside potential ratio
	Volatility skewness
	Variability skewness
	Farinelli–Tibiletti Ratio
	Gain–loss skewness
	Downside skewness and kurtosis
	Sortino ratio with higher order moments
Chapter 7 Prospect Theory
	Prospect ratio
	New Prospect ratio
	Omega–Prospect ratio
Chapter 8 Extreme Risk
	Extreme events
	Extreme value theory
	Value at risk (VaR)
	Relative VaR
	Ex-post VaR
	Potential upside (gain at risk)
	Percentile rank
	VaR Calculation Methodology
	Parametric VaR
	Modified VaR
	Historical simulation (or non‐parametric)
	Monte Carlo simulation
	Which Methodology for Calculating VaR Should Be Used?
	VaR Interpretation
	Frequency and time aggregation
	Time horizon
	Window length
	Reward To VaR
	Reward To Relative VaR
	Double VaR Ratio
	Conditional VaR (Expected Shortfall, Tail Loss, Tail VaR or Average VaR)
	Upper CVaR or CVaR+
	Lower CVaR or CVaR−
	Tail gain (expected gain or expected upside)
	Conditional Sharpe Ratio (Starr Ratio or Reward to Conditional VaR)
	Modified Sharpe Ratio (Reward to Modified VaR)
	Tail risk
	Tail ratio
	Rachev ratio (or R ratio)
	Generalised Rachev ratio
	Drawdown at risk
	Conditional drawdown at risk
	Reward to conditional drawdown
	Generalised Z ratio
Chapter 9 Fixed Income Risk
	Pricing fixed income instruments
	Redemption yield (yield to maturity)
	Weighted average cash flow
	Duration (effective mean term, discounted mean term or volatility)
	Macaulay duration
	Macaulay–Weil duration
	Modified duration
	Portfolio duration
	Effective duration (or option‐adjusted duration)
	Duration to worst
	Convexity
	Modified convexity
	Effective convexity
	Portfolio convexity
	Bond returns
	Duration beta
	Reward to duration
Chapter 10 Miscellaneous Risk Measures
	Upside capture ratio (or Up capture indicator)
	Downside capture ratio (or Down capture indicator)
	Up/down capture (or Capture ratio)
	Up number ratio
	Down number ratio
	Up percentage ratio
	Down percentage ratio
	Percentage gain ratio
	Batting average (or Relative batting average)
	Hurst index (or Hurst exponent)
	Relative Hurst index (or Active Hurst)
	Bias ratio
	Active share
	K ratio
Chapter 11 Risk‐Adjusted Return
	M
	M excess return
	Differential return
	GH1 (Graham and Harvey 1)
	GH2 (Graham and Harvey 2)
	Correlation and risk‐adjusted return M
	Return adjusted for downside risk
	Adjusted M
	Skew‐adjusted M
	Omega excess return
Chapter 12 A Periodic Table of Risk Measures
	Periodic table design
	Filling the periodic table
	Notation
Chapter 13 Risk‐Adjusted Performance Fees
	Performance fees
	Asymmetric or symmetric
	Performance fees in practice
Chapter 14 Performance Dashboards
	Effective dashboards
	Data visualisation tools
Chapter 15 Manager Selection
	Asset manager selection
	Manager evaluation
	Portfolio evaluation
	Monitoring and control
Chapter 16 The Four Dimensions of Performance
	Ex‐post return (the traditional dimension)
	Ex‐post risk (the neglected dimension)
	Ex‐ante return (the unknown dimension)
	Ex‐ante risk (the “sexy” dimension)
	Risk efficiency ratio
	Performance efficiency
	Ex‐ante risk standards
	Consistency in calculations and comparison
	Disclosure
	Recognition of adherence to best practice
	More robust internal process and control
Chapter 17 Which Risk Measure to Use?
	Why measure ex‐post risk?
	Which risk measures to use?
	Hedge funds
	Smoothing
	Outliers
	Data mining
	Risk measures and the Global Investment Performance Standards (GIPS®)
	Fund rating systems
	Which measures are actually used?
	Which risk measures should really be used?
	Common errors to avoid
Chapter 18 Risk Control
	Regulations in the investment risk area
	Risk control structure
	Risk management
Glossary of Key Terms
Appendix A Composite Internal Risk Measures
Bibliography
Index
EULA