Performance Evaluation of Market Timers: Theory and Evidence

Document Type

Article

Publication Date

12-1988

ISSN

1756-6916

Publisher

Cambridge University Press

Language

en-US

Abstract

Previous investigators have shown that the Sharpe measure of the performance of a managed portfolio may be flawed when the portfolio manager has market timing ability. Herein we develop the exact conditions under which the Sharpe measure will completely and correctly order market timers according to ability. The derived conditions are necessary, sufficient, and observable. We compare these derived conditions to empirical estimates of actual market conditions and find that, under typical market conditions, the practice of using quarterly portfolio return data will frequently result in a failure of the Sharpe measure to order timers according to ability. We show, however, that such failures can be greatly reduced by more frequent sampling of managed portfolio returns.

Comments

Prior to publication, this work was NBER Working Paper No. 2640.

Additional Files
Marks_Performance_Evaluation_WP.pdf (153 kB)
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