Singer-Terhaar and adding securities to portfolios
Anyone else notice that these are basically the same thing?
RP(asset class) = Std Dev(asset class) * Corr * sharpe ratio(mkt)
or
RP(asset class) / std dev(asset class) = Corr * sharpe ratio(mkt)
which is:
sharpe ratio(asset class) = Corr * sharpe ratio(mkt)
So basically:
Singer-Terhaar says that the SR of the asset class should equal the mkt SR times the correlation b/w the two.
In the context of asset class selection if the asset class SR is greater than portfolio SR * correlation b/w the two you should add it to the portfolio |