Portfolio Sharpening

11 Pages Posted: 5 Oct 2003

Date Written: September 21, 2003

Abstract

We explore the effective gain or loss in alpha from the point of view of the investor due to the volatility of a fund and its correlations to other asset classes. Fund managers and investors can be guided by this to increase the utility that is ultimately delivered to the investor. In this analysis of investor utility, the Sharpe ratio is shown to be misleading and the tracking error has no role at all. A new class of funds - called "hyperpassive" - is suggested which are similar to traditional index funds, but which aim to deliver a comparable expected return with less volatility than the benchmark. It is also shown that the optimal allocation to additional asset classes can be surprisingly high when the correlations are small.

Suggested Citation

Burns, Patrick J., Portfolio Sharpening (September 21, 2003). Available at SSRN: https://ssrn.com/abstract=449321 or http://dx.doi.org/10.2139/ssrn.449321

Patrick J. Burns (Contact Author)

Burns Statistics ( email )

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