Hi guys,
According to CFA the Squared Sharpe ratio for an actively managed portfolio is equal to Squared Sharpe Ratio of the Benchmark + Information Ratio Squared.
Reading 54, example 3, question 1 - asks that we determine the which of 2 actively managed funds would better combine with a passive benchmark. The question stipulates that IR for fund 1 = -0.25, and the IR for fund 2 = 0.05. Therefore because fund 2 has higher information ratio that it would a better match with benchmark…
My query is given that (-0.25)^2 is higher than (0.05)^2, shouldn’t portfolio 1 result in a higher IR and combined sharpe ratio and therefore result in a better combination???
Any feedback would be greatly appreciated, thanks.