Sharpe ratio average, only

pawn

Hi, all

2008 Q3 PartA (i)

If you combine two portfolio(A and B), its Sharpe ratio is calculate weighted average of A and B?

Is this calculation only approximation or theoretically accurate?

Thanks in advance.

canadiananalyst

Thanks gjertsen for the correction. Correlation should have been 1 and not 0 in my post, for weighted avg to be used.

thommo77

Thank you !!

bodhisattva

I'm thinking you meant correlation would have to be 1.0 for the Sharpe ratio of the portfolio to be the weighted avg. of the Sharpe ratio of the assets. Anything less than 1.0 would bring diversification benefits, raising the Sharpe ratio above the weighted avg.

former

Approximation.

bpdulog

its return is calculated weighted average of A and B,
but its deviation is not

so Sharpe ration of averaged weight is only approximation

PalacioHill

Without going into that question, I will think it is only approximation.

Theoratically, when we combine 2 assets (or portfolios in this case), for any correlation not equal to 1, there are going to be diversification benefits. meaning the combined risk would fall and sharpe ratio would go up.

Does it mention/hint anywhere in the question that there is 0 correlation between these portfolios? In that case, when correlation is 0, Sharpe Ratio of the combination could be weighted average of A and B.

Just the way I am thinking..