Does the Use of Downside Risk-Adjusted Measures Impact the Performance of UK Investment Trusts?

Posted: 22 Aug 2010 Last revised: 24 Dec 2015

See all articles by Christopher J. Adcock

Christopher J. Adcock

University of Sheffield - School of Management

Nelson Areal

University of Minho - School of Economics and Management

Manuel J. Rocha Armada

University of Minho

Maria C. Cortez

University of Minho - School of Economics and Management

Benilde Oliveira

University of Minho - School of Economics and Management

Florinda Silva

University of Minho - School of Economics and Management

Date Written: July 31, 2010

Abstract

This paper investigates the impact of using different risk-adjusted measures of performance on the evaluation of UK investment trusts. Significant negative skewness is probably the most important empirical property of the time series of returns under analysis. Performance results based on the Sharpe Ratio and several downside risk-adjusted performance measures (the Sortino ratio, excess return on Cornish-Fisher VaR, excess return on VaR, and excess return on Expected Shortfall) are compared. VaR and Expected Shortfall are computed using Filtered Historical Simulation (FHS), a hybrid methodology that combines the use of volatility models with bootstrapping techniques and is robust to the empirical characteristics of our data.

Four alternative measures, both parametric and non-parametric, are applied in order to assess the level of association between different performance measures. The Pearson correlation coefficient is applied in the context of the parametric approach. Additionally, two alternative non-parametric measures of rank correlation are used: Spearman´s coefficient and Kendall´s Tau. As an alternative to these rank correlation analysis, Cohen´s Kappa, a non-parametric measure based on contingency table statistics is also computed. The observed level of association between Sharpe Ratio and the downside risk-adjusted measures of performance is not as low as would be expected considering the empirical properties of our data. However, an additional analysis based on a simulated sample of returns, with a higher variability in the skewness and the kurtosis of the time series, demonstrates that the choice of the performance measure does indeed have an impact on the performance assessment of investment portfolios. With respect to the simulated time series of returns considerable lower levels of association are reported especially with the application of Cohen´s Kappa statistic.

Keywords: Fund performance evaluation, Downside risk-measures, Filtred historical simulation

JEL Classification: D81, G10, G11, G29

Suggested Citation

Adcock, Christopher J. and Brandão da Costa Areal, Nelson Manuel de Pinho and Rocha Armada, Manuel José and Ceu Cortez, Maria and Oliveira, Benilde and Silva, Florinda, Does the Use of Downside Risk-Adjusted Measures Impact the Performance of UK Investment Trusts? (July 31, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper, Available at SSRN: https://ssrn.com/abstract=1662627 or http://dx.doi.org/10.2139/ssrn.1662627

Christopher J. Adcock

University of Sheffield - School of Management ( email )

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

Nelson Manuel de Pinho Brandão da Costa Areal

University of Minho - School of Economics and Management ( email )

University of Minho
School of Economics and Management
Braga, 4710-057
Portugal
+351 253 601 380 (Fax)

HOME PAGE: http://nelsonareal.net

Manuel José Rocha Armada

University of Minho ( email )

Sch. Economics & Bus Administration
Gualtar
Braga, MINHO 4710-057
Portugal
+351 253 60 44 55 (Phone)

Maria Ceu Cortez

University of Minho - School of Economics and Management ( email )

Campus Gualtar
Braga, 4710-057
Portugal

Benilde Oliveira (Contact Author)

University of Minho - School of Economics and Management ( email )

Campus Gualtar
Braga, 4710-057
Portugal

Florinda Silva

University of Minho - School of Economics and Management ( email )

Campus Gualtar
Braga, 4710-057
Portugal
351 253 604564 (Phone)
351 253 601380 (Fax)

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