Sharpe–Risk Tradeoffs in Portfolios of Corporate Bonds
8 Pages Posted: 25 Jun 2019 Last revised: 27 Feb 2020
Date Written: June 20, 2019
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: Suggested Citation