Original Research

Establishing the risk denominator in a Sharpe ratio framework for share selection from a momentum investment strategy approach

Chris van Heerden
South African Journal of Economic and Management Sciences | Vol 23, No 1 | a3467 | DOI: https://doi.org/10.4102/sajems.v23i1.3467 | © 2020 Chris van Heerden | This work is licensed under CC Attribution 4.0
Submitted: 18 November 2019 | Published: 31 August 2020

About the author(s)

Chris van Heerden, Department of Economic Sciences, Faculty of Economic and Management Sciences, North-West University, Potchesfstroom, South Africa


Background: Based on the static mean-variance portfolio optimisation theory, investors will choose the portfolio with the highest Sharpe ratio to achieve a higher expected utility. However, the traditional Sharpe ratio only accounts for the first two moments of return distributions, which can lead to false portfolio performance diagnostics with the presence of asymmetric, highly skewed returns.

Aim: With many criticising the standard deviation’s applicability and with no consensus on the ascendency of which other risk denominator to consult, this study contributes to the literature by validating the importance of consulting value-at-risk as the more commendable risk denominators for the Johannesburg Stock Exchange.

Method: These results were derived from a novel index approach that produces a comprehensive risk-adjusted performance evaluation score.

Results: Of the 24 Sharpe ratio variations under evaluation, this study identified the value-at-risk Sharpe ratio as the better variation, which led to more profitable share selections for long-only portfolios from a one-year and five-year momentum investment strategy perspective. However, the attributes of adjusting for skewness and kurtosis exhibited more promise from a three-year momentum investment strategy perspective.

Conclusion: The results highlighted the ability to outperform the market, which further emphasised the importance of active portfolio management. However, the results also confirmed that active and more passive equity portfolio managers will have to consult different Sharpe ratio variations to enhance the ability to outperform the market and a buy-and-hold strategy.


Admissible risk denominator; JSE; momentum investment strategy; risk-adjusted performance; shares; Sharpe ratio; South Africa.


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