Performance evaluation of market timers

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Previous investigators have shown that the Sharpe measure of the performance of a managed portfolio may be flawed when the portfolio manager has market timing ability. We develop the exact conditions under which the Sharpe measure will completely and correctly order market timers according to ability. The derived conditions are necessary, sufficient, and observable. We compare them to empirical estimates of actual market conditions, and find that the circumstances which can lead to a failure of the Sharpe measure do in fact occur. We show, however, that such failures can be greatly reduced by more frequent sampling.