Practical Risk-Adjusted Performance Measurement

323 Pages·2021·3.532 MB·English

by  Carl R. Bacon

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Practical
Risk-Adjusted
Performance
Measurement
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ForothertitlesintheWileyFinanceseriespleaseseewww.wiley.com/finance
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Practical
Risk-Adjusted
Performance
Measurement
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CARL R. BACON
Second Edition
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Thissecondeditionfirstpublished2022
Copyright©2022JohnWiley&Sons,Ltd
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LibraryofCongressCataloging-in-PublicationData
Names:Bacon,CarlR.,author.
Title:Practicalrisk-adjustedperformancemeasurement/CarlR.Bacon.
Description:Secondedition.|Hoboken,NJ:Wiley,2022.|Series:Wiley
financeseries|Includesbibliographicalreferencesandindex.
Identifiers:LCCN2021028308(print)|LCCN2021028309(ebook)|ISBN
9781119838845(cloth)|ISBN9781119838869(adobepdf)|ISBN
9781119838876(epub)|ISBN9781119838883(obook)
Subjects:LCSH:Financialriskmanagement.|Performancestandards.|Risk
management.
Classification:LCCHD61.B332022(print)|LCCHD61(ebook)|DDC
658.15/5—dc23
LCrecordavailableathttps://lccn.loc.gov/2021028308
LCebookrecordavailableathttps://lccn.loc.gov/2021028309
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Setin11/13ptSTIXTwoTextbyStraive,Chennai,India
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ThisbookisdedicatedtothestaffofFrederickGentSchool,
SouthNormanton,Derbyshire.Theysetmeonmyway.
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Contents
Preface xv
Acknowledgements xvii
AbouttheCompanionWebsite xix
CHAPTER1
Introduction 1
Definitionofrisk 1
Risktypes 1
Riskmanagementversusriskcontrol 5
Riskaversion 5
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Expostandexante 6
Dispersion 6
CHAPTER2
DescriptiveStatistics 7
Mean(orarithmeticmean) 7
Annualisedreturn 8
Continuouslycompoundedreturns(orlogreturns) 9
Winsorisedmean 10
Meanabsolutedeviation(ormeandeviation) 11
Variance 12
Meandifference(absolutemeandifferenceorGinimean
difference) 16
Relativemeandifference 16
Bessel’scorrection(populationorsample,norn−1) 16
Samplevariance 20
Standarddeviation(variabilityorvolatility) 20
Annualisedrisk(ortimeaggregation) 22
TheCentralLimitTheorem 23
Frequencyandnumberofdatapoints 24
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viii CONTENTS
Alternativeriskannualisationmethods 25
Normal(orGaussian)distribution 26
Histograms 28
Skewness(Fisher’sormomentskewness) 28
Sampleskewness 31
Kurtosis(Pearson’skurtosis) 31
Excesskurtosis(orFisher’skurtosis) 33
Samplekurtosis 33
Bera–Jarquestatistic(orJarque–Bera) 34
Covariance 35
Samplecovariance 40
Correlation(𝜌) 40
Samplecorrelation 41
Autocovariance 41
Autocorrelation(orserialcorrelation) 41
Annualisedvariabilityifreturnsareautocorrelated 43
CHAPTER3
PerformanceAppraisalMeasures 47
Performanceappraisal 47
(cid:2) Sharperatio(rewardtovariability,Sharpeindex) 48 (cid:2)
Royratio 50
Risk-freerate 51
AlternativeSharperatio 51
RevisedSharperatio 52
AdjustedSharperatio 53
Skew-adjustedSharperatio 54
Skewness–kurtosisratio 58
AlternativeadjustedSharperatios 58
Smoothing-adjustedSharperatio 59
MADratio 60
Giniratio 60
Relativerisk 61
Trackingerror(ortrackingrisk,relativerisk,activerisk) 61
Relativeskewness 62
Relativekurtosis 63
Informationratio 63
Geometricinformationratio 64
Modifiedinformationratio 69
Adjustedinformationratio 70
Skew-adjustedinformationratio 70
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