X-Sigma-Rho and Market Efficiency

G. Glenn Baigent

Abstract


Menchero and Davis (2011) define X-Sigma-Rho as a risk metric that shows the marginal contribution to risk when a security is added to a portfolio of other securities.  While insightful regarding risk, their work is incomplete because it does not consider the marginal contribution to return. This paper completes their analysis by including marginal contribution to return. In equilibrium the result is the capital market line and a measure similar to Jensen’s alpha that can be used to measure performance.


Keywords


Market efficiency; Performance measure; X-sigma rho.

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References


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http://dx.doi.org/10.1111/j.1540-6261.1968.tb00815.x

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DOI: http://dx.doi.org/10.18533/jefs.v2i02.133

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