X-Sigma-Rho and Market Efficiency

Authors

  • G. Glenn Baigent LIU – Post, College of Management, 720 Northern Blvd., Brookville, NY 11548

DOI:

https://doi.org/10.18533/jefs.v2i02.133

Keywords:

Market efficiency, Performance measure, X-sigma rho.

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.

References

Amenc, N., and L. Martellini, 2012. Forget about alpha. The Journal of Portfolio Management, 38(04): 04 05.

Baigent, G., 2005. Six simple proofs for intro to finance courses. Advances in Financial Education, 03: 5-47.

Davis, B, and J. Menchero., 2012. The alpha and beta of risk attribution. The Journal of Portfolio Management, 38 (02): 99-107. http://dx.doi.org/10.3905/jpm.2012.38.2.099

Elton, E. M. Gruber, and M. Padberg., 1978. Simple criteria for portfolio selection: tracing out the efficient frontier. Journal of Finance, 33(01): 296-302. http://dx.doi.org/10.1111/j.1540-6261.1978.tb03407.x

Jensen, M. C., 1968. The performance of mutual funds in the period 1945-1964. Journal of Finance, 23(02): 389-416.

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

Menchero, J., and B. Davis., 2011. Risk contribution is exposure time's volatility time's correlation: decomposing risk using the x-Sigma-rho formula. The Journal of Portfolio Management, 37(02): 97-106. http://dx.doi.org/10.3905/jpm.2011.37.2.097

Sharpe, W. F., 1968. Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance, 19(03): 425-442. http://dx.doi.org/10.1111/j.1540-6261.1964.tb02865.x, http://dx.doi.org/10.2307/2977928

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Published

2014-04-21

Issue

Vol. 2 No. 02 (2014): April

Section

Articles

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