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Conditional inference on the asset with maximum Sharpe ratio

We apply the procedure of Lee et al. to the problem of performing inference on the signal-noise ratio of the asset which displays maximum sample Sharpe ratio over a set of possibly correlated assets. We find a multivariate analogue of the commonly used approximate standard error of the Sharpe ratio to use in this conditional estimation procedure. We also consider several alternative procedures, including the simple Bonferroni correction for multiple hypothesis testing, which we fix for the case of positive common correlation among assets, the chi-bar square test against one-sided alternatives, Follman's test, and Hansen's asymptotic adjustments. Testing indicates the conditional inference procedure achieves nominal type I rate, and does not appear to suffer from non-normality of returns. The conditional estimation test has low power under the alternative where there is little spread in the signal-noise ratios of the assets, and high power under the alternative where a single asset has high signal-noise ratio. Unlike the alternative procedures, it appears to enjoy rejection probabilities montonic in the signal-noise ratio of the selected asset.

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