Once the optimal level of active risk is determined, the actively managed portfolio can be combined with a position in the benchmark portfolio to maximize the Sharpe ratio. The optimal amount of active risk that maximizes the Sharpe ratio but keeps the same information ratio can be determined by: The information ratio is a key criterion on which to evaluate actively managed portfolios. This implies that the higher the information ratio, the higher the Sharpe ratio. With an actively managed portfolio and the benchmark portfolio, we can adjust active risk and return of our portfolio. With a risk-free asset and a single risky portfolio with the maximum Sharpe ratio, we can adjust absolute risk and return of our portfolio. Note the LOS requires that you "calculate and interpret the information ratio and contrast it to the Sharpe ratio." This section is not required. This is because both the active return and active risk increase proportionally. The information ratio will remain unchanged if all the active security weights are multiplied by a constant.
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