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    A Probabilistic Risk-to-Reward Measure for Evaluating the Performance of Financial Securities

    Maguire, Phil and Moser, Philippe and McDonnell, Jack and Kelly, Robert and Fuller, Simon and Maguire, Rebecca (2013) A Probabilistic Risk-to-Reward Measure for Evaluating the Performance of Financial Securities. In: IEEE Conference on Computational Intelligence for Financial Engineering & Economics (CIFEr), 2013. IEEE, pp. 102-109. ISBN 9781467359214

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    Existing risk-to-reward measures, such as the Sharpe ratio [1] or M2 [2], are based on the idea of quantifying the excess return per unit of deviation in an investment. In this preliminary article we introduce a new probabilistic measure for evaluating investment performance. Randomness Deficiency Coefficient (RDC) expresses the likelihood that the observed excess return of an investment has been generated by chance. Some of the advantages of RDC over existing measures are that it can be used with small historical datasets, is time-frame independent, and can be easily adjusted to take into account the familywise error rate which results from selection bias. We argue that RDC captures the fundamental relationship between risk and reward and prove that it converges with Sharpe’s ratio.

    Item Type: Book Section
    Keywords: convergence; financial management; investment; probability; risk analysis; securities trading;
    Academic Unit: Faculty of Science and Engineering > Computer Science
    Item ID: 6486
    Identification Number:
    Depositing User: Phil Maguire
    Date Deposited: 20 Oct 2015 15:22
    Publisher: IEEE
    Refereed: Yes
    Use Licence: This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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