Downside risk-adjusted performance measures: Can they recognize bankrupt asset allocation strategies?

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M.A. M.B.A.
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Recent work by Dr. Robert R. Grauer has shown that traditional performance measures, such as Jensen’s Alpha and the Sharpe Ratio, are unable to distinguish between perfect-foresight and bankrupt investments. In this paper, we test the ability of various downside risk-adjusted performance measures to identify bankrupt performance. Using zero percent as a minimal acceptable level of return, the Sortino ratio, the upside potential ratio and the portfolio performance index can distinguish bankrupt strategies from non-bankrupt ones. However, the ranking based on these measures over non-bankrupt strategies are inconsistent with the ranking of accumulated wealth over the 1934-1999 period.
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