I am comparing an equally weighted portfolio vs an optimal portfolio with the same data. The Equally weighted porfolio has a higher sharpe ratio but lower $ return, while the optimal portfolio has a lower sharpe ratio and a higher return.
My questions is
Is this possible or does the higher sharpe ratio always have to the highest $ return
Was it better to diversify and why?
Sharpe ratio is the amount of excess return per unit standard deviation of the portfolio. So, if a portfolio has a higher sharpe ratio then it returns more value per unit of risk. It may be the case that the dollar return is less as compared to another portfolio with a lower sharpe ratio which though has a higher risk but higher return.
Yes, it is to diversify as it reduces the unsystematic risk present in the individual securities and thus increases the sharpe ratio.
Get Answers For Free
Most questions answered within 1 hours.