Performance Appraisal: Capture Ratios

Mara is calculating a capture ratio with a spreadsheet and says that it's fine to use zeros instead of blanks for the upside capture values. She calculates a 4% upside capture. David says that using zeros instead of blanks will make the upside capture incorrect. Who is right?

She's not, actually. The values used (returns for the portfolio and the benchmark) are placed in a geometric mean calculation for the upside capture. If extra zeros are added, this will change the geometric mean.

Precisely! The values used (returns for the portfolio and the benchmark) are placed in a geometric mean calculation for the upside capture. If extra zeros are added, this will cause the calculated geometric mean to be lower than it really is, since Mara's biased calculation was still positive at 4%. If a negative upside capture was calculated, these zeros would have provided an upward bias instead.

Incorrect. Adding zeros to a series of returns with a positive average will not cause the mean return calculated to increase.

Mara; it's still correct

David; the calculation is too low

David; the calculation is too high