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Performance Metrics Overview

Performance Metrics Types

Sharpe first proposed a ratio of excess return to total risk as an investment performance metric. Subsequent work by Sharpe, Lintner, and Mossin extended these ideas to entire asset markets in what is called the Capital Asset Pricing Model (CAPM). Since the development of the CAPM, a variety of investment performance metrics has evolved.

This section presents four types of investment performance metrics:

  • The first type of metrics is absolute investment performance metrics that are called "classic" metrics since they are based on the CAPM. They include the Sharpe ratio, the information ratio, and tracking error. To compute the Sharpe ratio from data, use sharpe to calculate the ratio for one or more asset return series. To compute the information ratio and associated tracking error, use inforatio to calculate these quantities for one or more asset return series.

  • The second type of metrics is relative investment performance metrics to compute risk-adjusted returns. These metrics are also based on the CAPM and include Beta, Jensen's Alpha, the Security Market Line (SML), Modigliani and Modigliani Risk-Adjusted Return, and the Graham-Harvey measures. To calculate risk-adjusted alpha and return, use portalpha.

  • The third type of metrics is alternative investment performance metrics based on lower partial moments. To calculate lower partial moments, use lpm for sample lower partial moments and elpm for expected lower partial moments.

  • The fourth type of metrics is performance metrics based on maximum drawdown and expected maximum drawdown. To calculate maximum or expected maximum drawdowns, use maxdrawdown and emaxdrawdown.

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