Econometric Modeling to Measure the Efficiency of Sharpe’s Ratio with Strong Autocorrelation Portfolios

Karime Chahuán-Jiménez,Rolando Rubilar-Torrealba,Hanns De La Fuente-Mella,A Dionisio

doi:10.1155/2022/5006392

Abstract

Highlights

Introduction e assessment of financial assets determines how an investment has behaved against some contrast parameter, providing signals about whether a decision exceeds or falls short of the investor’s expectations. is type of evaluation improves financial activity by making an investment decision based on a set of alternatives, enabling the investor to make an adequate selection regarding the combination of risk and return. e investor, using information about the yields of financial assets, can make decisions about the composition of his or her portfolio
Bessler et al [2] indicated that diversification benefits use various asset allocation strategies, such as 1/N, risk parity, minimum variance, and mean variance, analysing whether an industry- or country-based approach provides superior performance, but depending on the conditions of the financial markets, a strategy could be better compared with another depending on the assets that make up the portfolio
According to Bailey et al [3], a portfolio design based on retrospective tests often fails to deliver real performance. e research indicates that, given any desired performance profile, a portfolio composed of common securities is designed as constituent of the S&P 500 index, which achieves the desired profiling based on sample backtest data

Summary

Introduction

Sharpe’s ratio is the most widely used index for establishing an order of priority for the portfolios to which the investor has access, and the purpose of this investigation is to verify that Sharpe’s ratio allows decisions to be made in investment portfolios considering different financial market conditions. e research is carried out by autoregressive model (AR) of the financial series of returns using Sharpe’s ratio for evaluations looking over the priority of financial assets which the investor can access while observing the effects that can cause autocorrelated series in evaluation measures for financial assets. e results presented in this study confirm the hypothesis proposed in which Sharpe’s ratio allows decisions to be made in the selection of investment portfolios under normal conditions thanks to the definition of a robustness function, whose empirical estimation shows an average 73% explanation of the variance in the degradation of the Spearman coefficient for each of the performance measures; given the presence of autocorrelation in the financial series of returns, this similarity is broken. E research is carried out by autoregressive model (AR) of the financial series of returns using Sharpe’s ratio for evaluations looking over the priority of financial assets which the investor can access while observing the effects that can cause autocorrelated series in evaluation measures for financial assets. Bessler et al [2] indicated that diversification benefits use various asset allocation strategies, such as 1/N, risk parity, minimum variance, and mean variance, analysing whether an industry- or country-based approach provides superior performance, but depending on the conditions of the financial markets, a strategy could be better compared with another depending on the assets that make up the portfolio. Understanding that the existence of autocorrelation in time series is common, it is necessary to comprehend the effect of autocorrelation on work with financial time series

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Results