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Activity Number: 468
Type: Contributed
Date/Time: Wednesday, August 9, 2006 : 2:00 PM to 3:50 PM
Sponsor: Business and Economics Statistics Section
Abstract - #305633
Title: Easily Implemented Confidence Intervals and Hypothesis Tests for Sharpe Ratios under General Conditions
Author(s): J.D. Opdyke*+
Companies: DataMineIt
Address: 40 Tioga Way, Suite 240, Marblehead, MA, 01945,
Keywords: Sharpe Ratio ; market performance ; finance ; hypothesis test ; confidence interval ; portfolio
Abstract:

For a quarter century (since Jobson and Korkie 1981), derivations of the asymptotic distribution of the Sharpe ratio that are practically useable for generating confidence intervals or for conducting one- and two-sample hypothesis tests have relied on the restrictive---and now widely refuted---assumption of normally distributed returns. This paper presents an asymptotic distribution that is valid under general conditions (stationary and ergodic returns) and consistent with that of Christie (2005), but it is far simpler and more intuitive and mathematically tractable (it can be implemented easily in a spreadsheet). Also generalized beyond the normality assumption is the small sample bias adjustment presented in Christie (2005). A thorough simulation study examines the small sample behavior of the derived one- and two-sample estimators under leptokurtosis and asymmetry.


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