Correspondence: Wen-Kuei Chen, Department of Finance, I-Shou University, No. 1, Sec. 1, Syuecheng Rd., Dashu Township, Kaohsiung County 84001, Taiwan, ROC. Tel: +886 7 6577711#5720; Fax: +886 7 657 7056; E-mail: rexchen@isu.edu.tw

¹is a Professor in the Department of Finance, I-Shou University, Taiwan.

²is an assistant professor in the Finance Department at I-Shou University, where he teaches investment. He holds a PhD in systems science–business from Portland State University.

³is a Master student in the Finance Department at I-Shou University.

Received 20 June 2007; Revised 20 June 2007.

Abstract

Sharpe ratio and information ratio have been widely used to evaluate mutual fund performance. Both measures compare fund returns to those of certain benchmark portfolios, such as the risk-free rate or the mean return to a pre-designated market index, respectively. Israelsen finds that both measures could generate anomalous ranking when fund returns are negative, and proposes a refined solution. The proposed refinement, however, produces fund rankings that are not necessarily consistent with the dominance rules in mean-variance analysis. This paper proposes a new performance measure, efficiency ratio (ER), which uses the global minimum variance portfolio as the basis for comparison. The ER measure is shown to correct the inconsistency found in Israelsen's modified information ratio.