RSM330H1 Chapter Notes - Chapter 21: Sharpe Ratio, Information Ratio, Efficient-Market Hypothesis
Document Summary
Market efficiency prevails when investors compete for returns by adding mispriced stocks to portfolios. Assume all investors invest in passive strategies to avoid expensive costs of research and analysis. With less capital under active management, there is less research and stock prices will no longer reflect forecasts. Any analyst who does research has advantage and active investors will have superior performance. Optimal fraction to invest in risky market portfolio given by. Active investors are necessary to drive market prices to near-efficiency levels. Goal of active management is to maximize sharpe ratio. By design, active strategies do not have constant return distributions. Must keep track of portfolio composition with changes in portfolio mean and risk. We should look at irr/dollar-weighted rate of return. Most popular risk adjustment technique is to compare rates of return with other similar funds. Average returns of funds are ranked to give each fund percentile ranking within comparison universe.
