A Correlation-Based Portfolio Performance Measure

The authors develop a new correlation-based portfolio performance measure: the return of a portfolio minus the risk-free rate divided by the average of the portfolio return's coefficient of determination matrix. This measure informs an investor how skilled the manager is in achieving a high return with respect to correlation risk as well as how skilled the manager is in applying diversification benefits. The authors derive several extensions of the correlation ratio. The authors also show that correlation of correlation is a sensible and informative concept for manager evaluation.