Portfolio performance : the case of serial autocorrelation

Abstract

The use of the Sharpe ratio for the measurement of the performance of the financial assets is widely generalized, although there is empirical evidence of serious problems with the assumptions behind the distribution functions. This paper explores the conditions under which the Sharpe ratio is efficient to analyze the performance of financial asset portfolios, a situation that is not true in the presence of strong autocorrelation. We demonstrate the effect that autocorrelation has in determining the best means of performance measurement, defining a robustness function of the variance of the Spearman coefficient degradation, allowing to define monitoring and control criteria in the task of tracking the evolution of financial assets and makes an adequate selection of a combination of risk and return, expanding the spectrum of analysis for the performancemeasurement of the financial series, placing an alarmfor the evaluation of the performance of the financial assets.