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URL:  http://boards.fool.com/elan-i-understand-your-point-but-im-beginning-26109648.aspx

Subject:  Re: Optimizing Blends with Sharpe/(GSD^x) Date:  11/17/2007  7:30 PM
Author:  JeffLandon Number:  203997 of 253814

Elan,

I understand your point.

But I'm beginning to wonder if perhaps aiming for high CAGR is actually safer than aiming for high Sharpe. If it's just probabilities we're aiming at, maybe we need the extra cagr to actually outperform.

After all, again, optimizing for CAGR is already optimizing for smoothing returns out, as CAGR does best when absolute returns vary least.

Just thinking out loud here. I figure we're bad at predicting any of these measures. We're going to miss by wide margins, so we need extra room for slop.


An aside:

Optimizing for Sharpe lets the screen do relatively poorly when risk-free returns are low. That doesn't help your long-term results. Sharpe is looking for excess returns. Optimizing for CAGR is, in theory, superior in the sense that it forces the screen to be uncorrelated to the return of risk-free returns--it wants great absolute returns.
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