Im getting confused with these 3 formulas for Value Added in Portifolio management. Could someone, more intelligent help me understand these:
Formula 1: VA = (w x IR)/2
Formula 2: VA = (IR^2)/2Y
Formula 3: VA = a – Yw^2
Where: Y – is the level of risk aversion. Sorry couldn’t post the symbol here.
Sorted now. The answer is substituing w=IR/2Y in either formula.
CORRECTION:
I THINK I NOW REALLY GET IT:
The true Formula for VA = a – Yw^2.
However for OPTIMAL RISK ONLY - (in which case: w = IR/ 2Y );then the above two other fomula apply by simple substitution.
Don’t forget you can also calculate VA using IC x SQRT BR which equals the IR