“Financial crisis of past year offers many lessons,” reads the CFA Institute’s lead story in today’s e-mail news brief. The story is from The Wall Street Journal and points out how “we are nearly six months into one of the most impressive bull markets in memory,” with the DJIA up 46% and the NASDAQ up 60% since early March. While some trepidation remains, many seem relieved that the worst appears to be over. Good timing, perhaps, because many firms will soon begin their budget planning for 2010.

The past year has provided us with the opportunity to discover how our formulas behave when markets are really down … so far down that they caused 36-month (and longer) cumulative returns to be negative, which in turn resulted in some occasional strange looking results. Both the Sharpe and Information ratios seem to be in error, as they appear opposite of what we might expect. As a result, there are a few of us who are beginning to pursue some suggested rules as to how one might address this situation, should it occur again. This might be one of the lessons we learn from this crisis.