Generalized financial ratios

摘要

Ratios of random variables are prevalent in finance. Examples include: current ratio, sales margin, changes in capital employed, interest cover, liabilities ratio and financial leverage ratio. In this note, we derive the exact distribution of the ratio X/(X + Y) when X and Y are independent generalized Pareto random variables, Pareto distribution being the first and the most popular distribution used in finance. Copyright (c) 2007 John Wiley & Sons, Ltd.