Modified Sharpe Ratio
Posté le 11-Oct-2007 par Raisepartner

The modified Sharpe ratio is the ratio of the excess return divided by the Modified Value-at-Risk. Two portfolios with the same mean and the same volatility will be differentiated by their extreme losses.

The standard Sharpe ratio is valid only if the assets are normally distributed. As soon as the portfolio is composed of technology stocks, distressed companies, hedge funds, high yield bonds etc…this ratio is not valid anymore, because it does not take into account higher order moments of the distribution, like the skewness and the kurtosis.

See also : Sharpe ratio,