Alternative Investments
11 important questions on Alternative Investments
Give the formula of Sharpe ratio in names?
What does the Sharpe ratio answer?
- How much reward the strategy gives for one unit of standard deviation. That is: where is the strategy in the expected return-standard deviation space.
- Is it wise to invest all your wealth by means of this strategy.
What is the downside of using the Sharpe ratio?
- Short sample periods make these estimates noisy
- It does not provide a direct comparison with alternative strategies or a benchmark
- Most portfolio managers prefer to be compared against a (well-selected) benchmark. This makes sense even with short sample periods.
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What is the ratio used when comparison with a benchmark is made, and name the formula?
IR = average active return / active risk
What is Active risk also known as?
What is the difference between comparison with benchmark and static strategy?
What does the intercept a means?
- It denotes the average difference in return between the strategy and the "endogenously" determined benchmark.
- It is a measure of risk-adjusted performance.
What does a positive Alpha means?
- The strategy provides a higher return (on average) than a passive benchmark (determined by b)
What does a positive Alpha not necessarily mean?
- It does not necessarily mean that the strategy itself provides a better risk-return trade off than the
benchmark. - But it does mean that you can achieve a better
risk-return trade off by investing at least some part of
your money according to the strategy.
Give 3 examples of an asset pricing model
- Capital Asset Pricing Model (CAPM)
- Fama & French three factor model
- Carhart four factor model
What is beta according to the CAPM?
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