Sharpe Ratio

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.

A sharp question XD

Didn’t read this chapter yet, so also waiting for someone’s comment.

There are two types of Information Ratio: ex-ante and ex-post Since a portfolio manager always uses ex-ante IR before investing money, she would never engage in a estrategy with a negative IR, so that case is discarded. However, in case we need to evaluate portfolio manager performance we can find negative IRs sometimes of course.

Excellent point! Your answer is much clearer compared to the answer provided in the book. Thanks for taking the time to answer my question, cheers

I’m very happy to help :slight_smile: