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The Sharpe numerator is excess return, not mean return. Can you also explain why a hedge fund portfolio would increase your portfolio’s Sharpe ratio? Already w
by rTX5CMRXIfFG 3y ago
The Sharpe numerator is excess return, not mean return.
Can you also explain why a hedge fund portfolio would increase your portfolio’s Sharpe ratio? Already with the returns in the article it’s less than S&P500 so it’s likely somewhere below the CML as the efficient frontier.
- ProjectArcturis 3y agoOkay, the risk-free rate had been zero for so long that excess return was essentially equal to mean return. That nit picked, the addition of any source of return greater than the risk-free rate, if uncorrelated to the rest of the portfolio, will improve Sharpe. If the return is small, then the optimal allocation is small as well, but still nonzero. In CML terms, the existence of hedge funds as uncorrelated strategies changes the shape of the CML curve.
- swexbe 3y agoA low covariance with the rest of the portfolio will lower the denominator. As long as E(r) is higher than r_f, it’s possible to end up with a higher sharpe. Obv just leverage if you want a higher expected return.