Journal of Risk

Risk.net

Comparative analysis of total risk-based performance measures

Eero Pätäri

ABSTRACT

Methods of portfolio performance measurement in which the estimation of risk is based on total risk are compared in this paper from both theoretical and empirical viewpoints. Both full-scale and partial-scale measures of dispersion are used as risk surrogates. A new approach for quantifying downside risk allowing for differences in investor’s risk tolerance and the corresponding performance ratio are also suggested. The empirical experiments show that investment risk includes different dimensions that cannot necessarily be captured with a single risk surrogate, and, moreover, that these dimensions have impact also on the evaluation of relative performance.

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