Performance Perspectives Blog

Risk-adjusted returns & money weighting

by | Aug 19, 2009

Most academic articles that deal with “returns” are actually dealing with risk-adjusted returns. In the course of writing an article on this subject I came across countless such articles. In The Journal of Performance Measurement we’ve tackled both this subject as well as pure returns (i.e., returns without the adjustment for risk), as both topics have value.

One topic which I don’t recall seeing anything on is risk-adjusted performance relative to money-weighted returns. Given my general preference for the IRR, it’s high time I took on this topic. Later today I will conduct a webinar on risk-adjusted performance but sadly won’t be including anything on money-weighting as the subject hasn’t yet gotten enough of my attention.

When evaluating the risk of money managers, clearly the standard approach of measuring risk-adjustment relative to time-weighted returns makes sense. But what about cases where the returns should be money-weighted: should the risk-adjusted measure likewise be? I would think so. But how to accomplish this might require some further thought; something I intend to invest in the coming weeks. So stay tuned!

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