Anyone else notice that these are basically the same thing? RP(asset class) = Std Dev(asset class) * Corr * sharpe ratio(mkt) or RP(asset class) / std dev(asset class) = Corr * sharpe ratio(mkt) which is: sharpe ratio(asset class) = Corr * sharpe ratio(mkt) So basically: Singer-Terhaar says that the SR of the asset class should equal the mkt SR times the correlation b/w the two. In the context of asset class selection if the asset class SR is greater than portfolio SR * correlation b/w the two you should add it to the portfolio
I have no clue what you are talking about. You threw me off by using the RP. What is RP? What is SR?
me.tega Wrote: ------------------------------------------------------- > I have no clue what you are talking about. You > threw me off by using the RP. What is RP? What is > SR? I expect it to be Risk Premium and Sharpe Ratio
and Beta = Cov/Var(market)= Cor x Stdev(asset)/Stdev(market) now, use it into you formulas and you got CAPM, vicious circle…
FinNinja Wrote: ------------------------------------------------------- > Anyone else notice that these are basically the > same thing? > > RP(asset class) = Std Dev(asset class) * Corr * > sharpe ratio(mkt) > > or > > RP(asset class) / std dev(asset class) = Corr * > sharpe ratio(mkt) > which is: > sharpe ratio(asset class) = Corr * sharpe > ratio(mkt) > > So basically: > Singer-Terhaar says that the SR of the asset class > should equal the mkt SR times the correlation b/w > the two. > In the context of asset class selection if the > asset class SR is greater than portfolio SR * > correlation b/w the two you should add it to the > portfolio Looks pretty sound and accurate…Does the book say it’s an approximation?
I don’t think the book correlates these two formulas anywhere in the curriculum. I may be wrong though - I just noticed this from my own notes. Pfcfaataf - I didn’t see the CAPM thing - good call! Makes me wonder though, after all the different versions, how many formulas have we really learned through the whole curriculum? 1. Dividend Discount model 2. Sharpe Ratio 3. T-testing formulas I’m gonna say it’s 3. I’m going with that. jk By the way idreesz is correct RP=Risk premium, SR=Sharpe Ratio.
yeah, there was a question similar to this on the Schweser mock. BTW does anyone else feel that the multiple choice sections of the Schweser mocks are not representative of what will be on the test? Feel like its just rehashing the q-bank.
Yes in CFAI they list this concept as: Sharpe Ratio of new asset underconsideration > Sharpe Ratio of existing portfolio x Correlation between the two. The [Sharpe Ratio x Correlation] must be less than the Sharpe Ratio of the new asset in order to be added to the portfolio. Sounds to me like you said it right. I havent been using too much Schweser. Keeping my nose in CFAI books. Schweser scares me too much.
Thanks, FinNinja. This(“adding securities”) and the duration of options are two formulas not in Schweser.
i saw this on another thread but don’t want to hunt it down so im kidnapping this thread. Somebody said you add the liquidity premium to both segmented and integrated markets risk premia, is this correct? I thought it was only segmented…
say whaaa??? no way man im pretty sure you add the liquidity premium to both.
wi*LP+(1-wi)*LP=LP So it ends up with same LP – liquidity premium added.
i dont know what all of those fancy symbols mean deriv, but i think you add the premium
I reiterated what you said…adding it in both places.