How Do Efficiency Metrics Correlate? May Fund Managers Cherry-Select?

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Portfolio managers file their risk-adjusted efficiency the usage of Sharpe, Treynor, knowledge, and Sortino ratios, amongst different standard metrics.

After all, with more than a few measures to make a choice amongst, may fund managers be tempted to cherry-pick those who replicate maximum favorably on their efficiency? In all probability, however the potential of strategic variety simplest turns into an actual downside if the efficiency metrics have vulnerable or unfavorable correlations.

If all of them have top certain correlations, then there actually is not any variety recreation to play. If a just right, or dangerous, Sharpe ratio way an identical Treynor, knowledge, and Sortino ratios, then it infrequently makes a distinction which one (or two) is reported.

So, how do those primary efficiency metrics correlate, and feature their correlations modified through the years?

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To respond to those questions, we pulled all lively mutual fund supervisor returns for large-cap fairness price range going again to the Fifties. We then calculated each and every fund’s Sharpe, Treynor, Sortino, and data ratio on a one-year rolling foundation. With this information, we explored how the rank ordinal correlation between the metrics appears to be like over each and every decade and over the overall period of time.

First, over the overall period of time, Sharpe and Treynor ratios have top certain correlations as do the tips and Sortino ratios. However each Sharpe and Treynor ratios are weakly correlated with the tips and Sortino ratios. So, if a fund supervisor showcases their Sortino ratio and doesn’t spotlight their Sharpe or Treynor ratio, it will sign that they’re strategically settling on which measures to give.


Efficiency Metric Correlations: All Sessions, 1950 to 2023

Sharpe Ratio Treynor Ratio Data Ratio Sortino Ratio
Sharpe Ratio 1 0.95 0.25 0.24
Treynor Ratio 0.95 1 0.24 0.23
Data Ratio 0.25 0.24 1 0.99
Sortino Ratio 0.24 0.23 0.99 1

Subsequent, we tested the rank ordinal correlation of the 4 measures over each and every decade. The similar trend holds reasonably secure from 1950 to 2020. We didn’t see any inordinate divergence within the correlations over the kind of 70 years beneath overview.


Efficiency Metric Correlations: Fifties

Sharpe Ratio Treynor Ratio Data Ratio Sortino Ratio
Sharpe Ratio 1 0.95 0.11 0.09
Treynor Ratio 0.95 1 0.01 -0.01
Data Ratio 0.11 0.01 1 0.99
Sortino Ratio 0.09 -0.01 0.99 1

Efficiency Metric Correlations: Nineteen Sixties

Sharpe Ratio Treynor Ratio Data Ratio Sortino Ratio
Sharpe Ratio 1 0.97 0.35 0.32
Treynor Ratio 0.97 1 0.36 0.33
Data Ratio 0.35 0.36 1 0.98
Sortino Ratio 0.32 0.33 0.98 1

Efficiency Metric Correlations: Nineteen Seventies

Sharpe Ratio Treynor Ratio Data Ratio Sortino Ratio
Sharpe Ratio 1 0.98 0.38 0.33
Treynor Ratio 0.98 1 0.37 0.32
Data Ratio 0.38 0.37 1 0.98
Sortino Ratio 0.33 0.32 0.98 1

Efficiency Metric Correlations: Eighties

Sharpe Ratio Treynor Ratio Data Ratio Sortino Ratio
Sharpe Ratio 1 0.97 0.25 0.23
Treynor Ratio 0.97 1 0.23 0.20
Data Ratio 0.25 0.23 1 0.98
Sortino Ratio 0.23 0.20 0.98 1

Efficiency Metric Correlations: Nineteen Nineties

Sharpe Ratio Treynor Ratio Data Ratio Sortino Ratio
Sharpe Ratio 1 0.92 0.26 0.26
Treynor Ratio 0.92 1 0.22 0.21
Data Ratio 0.26 0.22 1 0.99
Sortino Ratio 0.26 0.21 0.99 1

Efficiency Metric Correlations: 2000s

Sharpe Ratio Treynor Ratio Data Ratio Sortino Ratio
Sharpe Ratio 1 0.97 0.27 0.25
Treynor Ratio 0.97 1 0.26 0.24
Data Ratio 0.27 0.26 1 0.99
Sortino Ratio 0.25 0.24 0.99 1

Efficiency Metric Correlations: 2010s

Sharpe Ratio Treynor Ratio Data Ratio Sortino Ratio
Sharpe Ratio 1 0.93 0.41 0.4
Treynor Ratio 0.93 1 0.44 0.43
Data Ratio 0.41 0.44 1 0.99
Sortino Ratio 0.40 0.43 0.99 1

After all, we explored the correlations all the way through recessions to peer in the event that they fell aside on the most crucial moments. Of the seven recessions because the Fifties, once more we discovered that the correlations stayed lovely very similar to what they have been all the way through non-recession classes.

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In all, the effects display that since Treynor and Sharpe ratios are extremely correlated, whether or not a fund supervisor reviews one and no longer the opposite isn’t particularly subject material. The similar holds with the tips and Sortino ratios.

However because the Treynor and Sharpe ratios are weakly correlated with the latter two metrics, managers may just be able for strategic reporting. So, if a fund supervisor reviews their Sortino or knowledge ratio however is going silent on their Sharpe and Treynor ratios, it will replicate a strategic play and warrant additional investigation.

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All posts are the opinion of the creator. As such, they will have to no longer be construed as funding recommendation, nor do the reviews expressed essentially replicate the perspectives of CFA Institute or the creator’s employer.

Symbol credit score: ©Getty Pictures / Uwe Krejci


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