The generalized Sharpe ratio used in optimal portfolio decision-making

Based on the research of Dowd about the criteria for which assets should be added to an existing portfolio, the criteria to choose the better (or best) one for investment among different candidate assets is deduced. Thus the range of the generalized Sharpe ratio is extended. The generalized Sharpe ratio is superior to the traditional Sharpe ratio because of its validation under the circumstance where correlation exists between the assets in question and the rest of the existing portfolio. Finally, the estimation error coming from the inappropriate use of benchmarks is also analyzed.