Performance Perspectives Blog

…you say poe-tay-toe, I say poe-tah-toe

by | Jul 10, 2009

Back on June 22nd I commented about a discussion I had with a colleague regarding the use of the term “volatility” for standard deviation and whether or not “variability” was more accurate.

I sent a note to Bill Sharpe, who in his 1966 Journal of Business article (“Mutual Fund Performance”) introduced his well known risk-adjusted measure, which he called “reward to variability” and what is better known today as the “Sharpe Ratio.” In the article he referred to Jack Treynor’s risk-adjusted measure as “reward to volatility.”

Here’s what I sent Bill: “Quick question for you: you referred to your risk-adjusted measure as “reward to variability” and Jack Treynor’s as “reward to volatility.” I stated in a recent newsletter that standard deviation is a measure of volatility. Do you find any objection to this? I know this is a nit-picky type issue, but a colleague found exception to my use of this term and felt that ‘variability’ is more correct. Just curious what you think. Thanks!”

And his response: “I think most people equate variability with volatility so not to worry. A better term for Jack’s measure would be ‘reward to beta.’ No one seems to have followed my terminology for either measure, since mine is now termed the ‘Sharpe Ratio’ by almost everyone (including me).”

Since we’ve heard from “one of the true masters,” I guess we can agree that the terms are interchangeable.

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