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

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.