Generating a high positive excess return in a prospective period does not necessarily increase the empirical Sharpe ratio of an investment fund. Therefore, we derive a critical range in which prospective excess returns must lie in order to increase its empirical Sharpe ratio. We also give a...

This article formalizes the undesirable property of the Sharpe ratio that a fund with a certain poor performance can increase its Sharpe ratio in a prospective period by generating a sufficiently negative excess return. Specifically, we set out the conditions that a fund must meet to be exposed...