The Impact of Downside Risk on Performance Appraisal of Investment Companies in the Tehran Stock Exchange(TSE).


Many performance measures, such as the classical Sharpe ratio have difficulty in evaluating the performance of investment companies whose return distributions are skewed. Common causes for skew ness are the use of options in the portfolio or superior market timing skills of the portfolio managers. In this article, we examine the ability of the downside risk and the upside potential ratio (UPR) in evaluating the skewed return distributions. We have used a sample of the active investment companies in the Tehran Stock Exchange (TSE) for the period of ??-march-???? to ??-march-????. In order to make a fair comparison between the Sharpe ratio and UPR, we assume that MAR in UPR plays the role of the risk-free rate in Sharpe ratio. We constructed a ranking based on both criteria, and we find a very high correlation between the Sharpe ratio and the UPR. This has seen to be the result of negative skew-ness in the return distributions. We has concluded that the skew-ness is a significant determinant. Therefore, we prefer to use the UPR as an alternative to the Sharpe ratio, as it gives a more adequate evaluation of the forecasting skills.