The Sharpe Ratio of Estimated Efficient Portfolios
15 Pages Posted: 27 Jan 2016 Last revised: 8 Feb 2016
Date Written: January 23, 2016
Investors often adopt mean-variance efficient portfolios for achieving superior risk-adjusted returns. However, such portfolios are sensitive to estimation errors, which affect portfolio performance. To understand the impact of estimation errors, I develop simple and intuitive formulas of the squared Sharpe ratio that investors should expect from estimated efficient portfolios. The new formulas show that the expected squared Sharpe ratio is a function of the length of the available data, the number of assets and the maximum attainable Sharpe ratio. My results enable the portfolio manager to assess the value of efficient portfolios as investment vehicles, given the investment environment.
Keywords: Portfolio performance, mean-variance analysis, estimation errors
JEL Classification: C13; C51; C61; G11
Suggested Citation: Suggested Citation