Sharpe first proposed a ratio of excess return to total risk as an investment performance metric. Subsequent work by Sharpe, Lintner, and Mossin extended these ideas to entire asset markets in what is called the Capital Asset Pricing Model (CAPM). Since the development of the CAPM, various investment performance metrics has evolved.
This section presents four types of investment performance metrics:
The first type of metrics is absolute investment performance
metrics that are called “classic” metrics since they
are based on the CAPM. They include the Sharpe ratio, the information
ratio, and tracking error. To compute the Sharpe ratio from data,
sharpe to calculate the
ratio for one or more asset return series. To compute the information
ratio and associated tracking error, use
calculate these quantities for one or more asset return series.
The second type of metrics is relative investment
performance metrics to compute risk-adjusted returns. These metrics
are also based on the CAPM and include Beta, Jensen's Alpha, the Security
Market Line (SML), Modigliani and Modigliani Risk-Adjusted Return,
and the Graham-Harvey measures. To calculate risk-adjusted alpha
and return, use
The third type of metrics is alternative investment
performance metrics based on lower partial moments. To calculate lower
partial moments, use
sample lower partial moments and
expected lower partial moments.