All Questions
Tagged with sharpe-ratio modern-portfolio-theory
21 questions
7
votes
1
answer
557
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Alternative relative performance measure to Sharpe ratio for non-IID return
The Sharpe ratio is often used to compare the relative performance of portfolios despite its IID-assumption for the returns being violated.
I can find ample warnings about the consequences of ...
- 73
5
votes
2
answers
798
views
Question about adding new investment A to portfolio B
I've found a ton of sources that mention the classic rule of
"If the Sharpe ratio of the new asset is greater than the Sharpe ratio of the existing portfolio times the correlation of the existing ...
- 51
5
votes
3
answers
3k
views
How can I find the portfolio with maximum Sharpe Ratio - Using Lagrange Multipliers
In Markowitz' portfolio theory we can construct portfolios with the minimum variance for a given expected return (or vice versa). Across expected risks, this traces out the well-known efficient ...
- 207
4
votes
2
answers
4k
views
Difference between Sharpe Ratio and Information Ratio
I am finding it difficult to understand the difference between the sharpe ratio and the information ratio and the relationship between the two, and cannot find a decent reference that breaks it down ...
- 307
4
votes
3
answers
27k
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What value should the risk free monthly return rate be (Sharpe ratio calculation)?
In calculating an annualized Sharpe ratio using monthly returns, what is commonly used as the value for the risk free rate? I am using this formula:
...
- 151
4
votes
2
answers
1k
views
How to derive the CAPM from maximizing the Sharpe ratio?
I know how to derive at the CAPM from a microeconomic foundation. In a recent University course I stumbled over a slide that derived the CAPM solely from the Sharpe ratio:
I cant come up with that ...
- 41
3
votes
2
answers
232
views
"Risk Matters Hypothesis" - does it really?
Risk.net has recently run a story about the "risk matters hypothesis" which refers to Sharpe’s Arithmetic and the Risk Matters Hypothesis by Haghani, Ragulin and White (2023).
If I ...
- 233
3
votes
1
answer
399
views
Proof that Sharpe ratio of the benchmark is related to the maximal information ratio and Sharpe ratio
I understand the economic logic behind it, that the active portfolio with the highest information ratio will also have the highest Sharpe ratio, but I can't see how
$SR_B^2 = SR_P^2 - IR^2 $
- 317
3
votes
1
answer
535
views
How to Maximize Portfolio Sharpe Ratio using Lagrange Multipliers in a Factor Model
I've come across the notes of the 2003 lecture "Advanced Lecture on Mathematical Science and Information Science I: Optimization in Finance" by Reha H. Tutuncu.
It describes on page 62 in ...
2
votes
1
answer
939
views
Many quants optimize sharpe ratios, sortino ratios, or anything of the form A/B. What about maximizing something of the form (AB)/(CD)?
The Sharpe ratio is defined as return/risk, generally as mean(ret)/sd(ret), where ret represents the data set of returns of an investment. However, I have seen other ratios that I also like. What I ...
2
votes
0
answers
78
views
Should the sharpe ratio always change with number of assets?
I am trying to understand if the Sharpe ratio of a portfolio change if we increase or decrease the number of assets in the portfolio. It would be helpful if you could provide an explanation with ...
- 21
2
votes
0
answers
51
views
Which performance evaluation measure to assess "Connectedness Matrix" based porfolios?
1. Question
Which performance evaluation measure would be best to assess the portfolios built on 'connectedness matrix'? The connectedness matrix is the concept introduced in the academic paper "...
- 550
0
votes
1
answer
227
views
Finding latest market price of market portfolio according to No Arbitrage
In Excel, I have the monthly stock price data for the past few years for Asset A and Asset B. I have calculated the monthly returns, mean returns, variances, and standard deviations for both stocks as ...
- 1
0
votes
1
answer
663
views
Which riskfree rate to use for Maximum Sharpe Ratio Portfolio?
I am conducting out of sample backtests of the MV framework. But how exactly do I derive the Maximum Sharpe Ratio portfolio for this? The standard forumula of the Sharpe Ratio is given by:
$$\frac{(...
- 87
0
votes
1
answer
818
views
How is breadth for Information Ratio Calculated
An alternative definition of the information Ratio (sharpe ratio) is:
$IR = IC\sqrt{BR}$
I have been reading Grinold and Kahn. I have the following questions for calculating BR:
Q1. If 500 stocks ...
- 269
0
votes
1
answer
2k
views
MPT Tangent Portfolio: Buck for the Bang Ratio
The $R_{TP}$ is the tangent portfolio return, but I don't understand the step regarding $\frac{dV(R)}{dw_n}$, you apply this, and how come it get rids of the summation?
- 111
0
votes
1
answer
198
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Question about marginal risk contribution / portfolio volatility decomposition
I am trying to understand the rule where you add a new asset to a portfolio if its Sharpe ratio is greater than the product of the portfolio sharpe ratio and the correlation between the portfolio and ...
- 1
0
votes
1
answer
238
views
Questions about Sharpe Ratio calculation
Let's say I have daily returns. Don't they depend on the risk per trade I am using? Obviously, if I'm risking 2% of equity per trade returns will be drastically different than when I'm using 10%? So ...
- 3
0
votes
1
answer
216
views
ESG Style Analysis
Hi all and thank you in advance.
Do you think that implementing a style analysis on ESG equity portfolios is feasible?
When I mean style analysis I refer to the seminal paper of Sharpe (1992) but I ...
- 139
0
votes
0
answers
286
views
Tangency portfolio negative maximum Sharpe ratio
Suppose I have three assets: the market, factor A and factor B. The market is in excess returns of the risk free rate. The other two factors are long-short portfolios. I have net returns for these ...
- 1
0
votes
0
answers
244
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Another variation of the 'Sharpe ratio' in CVaR-based portfolio optimization?
Question
What is the ratio S(p) shown below? Do we have a name for it like 'Sharpe ratio'?
The ratio above is introduced in the academic paper Optimal portfolio selection in a Value-at-Risk framework
...
- 550