Documenting your risk measure

At The Spaulding Group's PMAR Europe conference earlier this month, one speaker suggested that Bill Sharpe's revised eponymously named risk-adjusted return is more typically employed than the original. While I don't have a lot in the way of empirical evidence, I believe it's the other way around. I suspect that most performance and risk measurement folks are unaware that the Nobel Prize winner made a revision.

Regardless, this suggests to me that some disclosures are in order, whenever such information is reported.

The reality is, there are multiple ways to derive MANY of the risk and risk-adjusted measures our industry employs, from standard deviation (do we divide by "n" or "n-1," for example) to M-squared (i.e., Modigliani-Modigliani) to Sharpe ratio. Even the simple use of the word "alpha" can conjur up multiple methods.

In next month's newsletter, I will opine at length on this matter, as I feel a healthy amount of disclosures are warranted, to ensure the recipient understands (or has the opportunity TO understand) what's being shown. The reality is that too many client reports carry misleading or inappropriate statistics. I suspect the intent is always honorable. It's just that we sometimes get carried away.