Value Added= alpha-(risk aversion*residual risk^2)… why are we squaring residual risk?
Alpha= IR*residua risk & w* = IR/(2*risk aversion), where w* = Optimal Level of residual risk. Now in page 225 Schweser, w- residual risk- has been substituted for w*-optimal level of residual risk_. How is it possible that residual risk has been substituted for_ an optimal level of residual risk?
I mean w=alpha/IR whereas w*=IR/(2* risk aversion)???