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Subject:  Re: The Best Measure for the Best Blend Date:  11/18/2007  9:22 AM
Author:  emintz Number:  204027 of 270823

My default -- the S&P 500 -- but I can test it off of any index. Do you have some thought of one being better than another?

I would guess it doesn't make too much difference.

The problem I've run into with Alpha, is that backtested performance is so far above the S&P 500 that when I try to optimize for alpha I get blends that have unacceptably (to me) high GSD's (I'm talking in the 30's). But that's using only monthly data.

Another approach to your optimization is to use the Sharpe ratio, but modify the risk-free rate as a constant rather than using the treasury yield. For example, something I might call Sharpe(8) using a figure of 8% as the risk-free rate. You could vary that number and see how it affects future returns.

I've found that's actually a decent way to optimize a blend based on differential risk levels. I use a different value in optimizing, which yields blends that vary in their level of volatility.

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