Screening Rules and Portfolio Performance

Abstract

We analyze the use of alternative performance measures to rank and select assets. Previous literature centers on the effects of non-normality on rank correlations between orderings. Instead, we select the assets recommended by each performance measure (ordering) and analyze out-of-sample returns of the portfolio that contains them. The overall empirical findings show that performance measures are definitively relevant for subsequent portfolio returns. Assets selected by the Generalized Rachev ratio dominate other selections showing high cumulative returns after the 2008 downturn. The good performance is connected to the fact that these asset returns show high excess kurtosis but positive skewness and are insensitive to the momentum risk factor.

Keywords: Performance Measure, Ranking, Stochastic Dominance, Skewness

JEL Classification: C10, G11, G12