Tomasz, Thanks for raising this question (and for the good work you do).
The Sortino Ratio is a well regarding improvement upon the Sharpe; I urge you to consider adding the Sortino to the base metric array. Is there a reason you passed on it earlier? The Sharpe ratio has a lot of problems and I was not familiar with the AIRAP. One should be careful if it is built upon the Omega, which I believe introduces other problems. Regards, Scott --- In [email protected], "tf28373" <tom...@...> wrote: > > > Hello everyone > > I have been working on the choose of fitness function following the > Howard Bundy's advices in his "Quantitative Trading Systems" and come > across M. Sharma's Alternative Investments Risk Adjusted Performance > (AIRAP). > > The equation of it is as following: > > AIRAP = [ E pi*(1+TRi)(1-c) ] 1/(1-c) - 1, > > where TRi - ith period total fund return (in my opinon it can also be > ith trade net return), c - risk aversion parameter (author suggests to > set its value to c=4), i=1,...,N - number of periods (as for me it can > be number of trades), pi - the probability of the ith period's total > return (according to the author it can be replaced with 1/N). (For > futher information please check this working paper: > http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf > <http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf> .) > > M. Sharma argues that this measure captures all higher moments, > penalizes for higher volatility and leverage (downside risk is penalized > more) and has all merits of Sharp ratio, though without its limitations > and disadvantages. I have carried out some simulations on the artificial > returns of different distributions and indeed it makes some difference. > Nevertheless what I am suspicious about is the fact that it was the very > first time I found this objective function even though it was created by > Sharma about 5 years ago. As for me it can mean that AIRAP is in fact > far from being effective or/and practical fitness measure at least for > trader like us and nobody use it (maybe I am wrong...). Another issue > that concerns me a bit is omission of MaxDrawDown in the equation, which > - at least for me - is a very important risk measure. According to many > experienced wise people writing on this forum (like ex Mr Bundy), an > effective fitness function shouls take Max DD or some comparable risk > measure into consideration in order to be really useful. > > What do you think about AIRAP? Should I proceed with utilizing this > function? > > I am looking forward to your response. Thank you in advance. > > Tomasz >
