This attractive and readable brochure outlines in clear language five of the most popular, practical and effective ways for donors to make larger gifts or gifts of a lifetime. (#5000)
– December 22, 2015
It is true that in our paper we don’t elaborate on what it means to evaalute low-vol strategies against the cap-weighted index using Sharpe ratio or Jensen’s alpha. That’s because we considered this to be pretty straightforward. The whole point of low-vol investing is to get a higher return per unit of risk than the cap-weighted index. If you define risk as volatility this means the aim is to get a higher Sharpe ratio and if you define risk as beta it means the aim is to get a positive Jensen’s alpha. So what could be more natural than evaluating a real-life low-vol strategy using precisely these measures?If you want to assess if low-vol strategies did better than the market, simply look at whether their Sharpe was higher (or whether their Jensen’s alpha was positive) compared to the market index. By the way, in this way you specifically prevent switching out of low-vol at precisely the wrong moment, because if low-vol has lower returns than the market during a boom, it may still have the same or even a better Sharpe ratio (or positive Jensen’s alpha). That’s the whole point of using a risk-adjusted performance measure.Alternatively, if you want know how your fund is performing relative to other low-vol funds, simply compare their Sharpe ratios or Jensen’s alphas. This way you can assess whether your fund is e.g. a top quartile fund or a bottom quartile fund among the group of low-vol funds that you’re looking at.
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