Effects of smoothing?

What are the effects of smoothing (using appraisals)?

  • volatility/variance biased downward

  • correlations (with other assets) biased downwards

I had in my notes that it would also bias sharpe downward, but that doesn’t seem right if std dev is biased downward…

In short- S.R. is likely to be “too high”; expected return is overinflated relative to the stated level of risk.

Ok, that make sense; i get confused with how they phrase “biased upward” and “biased downward” sometimes.

To me that means Sharpe is biased upward.

When you smooth, you decrease your volatility thus standard dev would decrease which would result in upward biased SR

can someone explain the correlation piece. To me if there is no smoothing then returns are all over the place making it less correlated to everything else. So to me smoothing leads to higher correlations…

Thank you

Smoothing X = unreal standard deviation of X =NOT standard deviation of Y = in correlation between X and Y = untrue degree of diversification benefit attributable to X