Abstract
Established risk-adjusted investment performance measures such as the Sharpe Ratio, the Sortino Ratio, or the Calmar Ratio have been developed with an exclusive focus on the mutual and hedge fund industries. Consequently, they are less suited for liability-driven investors such as life insurance companies, whose portfolio choice is materially affected by the substantial interest rate sensitivity of their long-term contractual obligations. In order to tackle this limitation, we propose an Asset-Liability Sharpe Ratio, which is theoretically motivated, easy to estimate, incentive compatible, and conveys information that is not included in existing measures. <b>TOPICS:</b>Risk management, performance measurement <b>Key Findings</b> • Established risk-adjusted investment performance measures such as the Sharpe Ratio, the Sortino Ratio, or the Calmar Ratio have been developed with an exclusive focus on the mutual and hedge fund industries. • Consequently, they are less suited for liability-driven investors such as life insurance companies, whose portfolio choice is materially affected by the substantial interest rate sensitivity of their long-term contractual obligations. • In order to tackle this limitation, we propose an Asset-Liability Sharpe Ratio, which is theoretically motivated, easy to estimate, incentive compatible, and conveys information that is not included in existing measures.
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