Sharpe–Risk Tradeoffs in Portfolios of Corporate Bonds

8 Pages Posted: 25 Jun 2019 Last revised: 27 Feb 2020

Date Written: June 20, 2019

Abstract

A portfolio replication approach is used to determine the implied cost of risk for a client's portfolio. This allows us to quantify with a single number, the extent a long-only investment manager is delivering on the twin goals of (1)~Sharpe ratios as high as possible, and (2) having actual risk as close as possible to target risk. A CAPM-like world for credit portfolios is assumed: idiosyncratic risk may be diversified away and only the remaining systematic risk is priced. The broad idea is however more widely applicable.

Keywords: Risk target, Sharpe ratio

JEL Classification: G12

Suggested Citation

Forbes, Keith, Sharpe–Risk Tradeoffs in Portfolios of Corporate Bonds (June 20, 2019). Available at SSRN: https://ssrn.com/abstract=3407419 or http://dx.doi.org/10.2139/ssrn.3407419

Keith Forbes (Contact Author)

Fairtree Capital ( email )

8 Boundary Rd
Newlands, 7700
South Africa

HOME PAGE: http://fairtree.com

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