Risk-adjusted performance measures and implied risk-attitudes

In this article we study the relation between performance measures and preferences functions. In particular, we examine to what extent performance measures can be used as alternatives for preference functions. We study the Sharpe ratio, Sharpe’s alpha, the expected return measure, the Sortino ratio, the Fouse index, and the upside potential ratio. We find that the first three measures correspond to the preferences of investors with a low degree of risk aversion, whereas the latter three measures correspond to the preferences of investors with intermediate and high degrees of risk aversion.