Sharpe and Adding Managers

CFA Level III
#1

I’m having a mental blank. When you are thinking of adding a manager or portfolio based on Sharpe Ratios - if the portfolio SR x Corr. of New Manager to Portfolio is less than New Manager Sharpe Ratio, then you can add the New Manager?

#2

Yes. This is just a way to quantify and say that the new manager is a ‘value-addition’ to the portfolio.

#3

less than new manager’s sharpe ratio, is it true?

#4

The new managers SR has to be more than portfolioSR*correlation

#5

Yes, that is right

#6

Cool, thanks.

#7

It also works for adding a new asset class, if I recall.

#8

which LOS is this?

#9

8-26-K is the asset class one.

#10

hey, it’s not there on 8-26-k

#11

also, can you explain why the Port SR x Corr has to be smaller than then new mgr SR similar to asset class too.

#12

If Corr = 1, then why add the manager? He will not add any value to the portfolio… You want someone, whose returns are less correlated with the portfolio return… why use Sharpe ratio? well, it’s one way to standardize the returns of the managers to be able to compare apples to apples… The same story is with the assets…

#13

the new manager’s sharp ratio time correlation has to be HIGHER than the current manager’s sharp ratio. If the new manager is going to REDUCE your sharpe ratio, why the hell would you want to add them?

#14

the new manager’s low correlation with the portfolio returns does not mean the manager will lower the portfolio’s Sharpe Ratio…

#15

It will be easy to remember, or even to figure out the formula if you do not remember, when you think about the scenario of negative correlation between the new manager(asset class) and the current portfolio.

#16

deep2002 Wrote: ------------------------------------------------------- > the new manager’s sharp ratio time correlation has > to be HIGHER than the current manager’s sharp > ratio. If the new manager is going to REDUCE your > sharpe ratio, why the hell would you want to add > them? Dammit guys, now I’m all mixed, is Deep2002 right, or La Grande finale right? Which one is it: Mgt Sharpe > Ptf Sharpe * Correlation or Mgt sharpe < Ptf Sharpe * Correlation Thanks! J.

#17

Correlation * the new manager Sharpe must beat the Existing portfolio Sharpe in order to justify adding it. Correlation must be < or = 1, so if you multiplied to the existing portfolio Sharpe it would be easier for the new Mgr to beat and justify adding. multiplying by the New Mgr Sharpe vs Existing makes it more difficult to qualify for the portfolio