soverby

Please be careful with that => sharpe ratio, and correlation

If you add more securities into ur PF, correlation is included into the new Sharpe ratio calculated as u have updated expected portfolio variance with the new sec.

The Sharpe ratio may be higher because:
1. new expected PF variance is lower while other factors remaining constant
1. new expected PF return is higher while other factors remaining constant

Sharpe ratio only tells you that if SR2 > SR1 => Expected risk adjusted return is improved

Nevertheless, be careful with variance as a risk measure as it implies returns are normally distributed



Edited 1 time(s). Last edit at Tuesday, June 21, 2011 at 11:30AM by Fridge.