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|Subject: Re: Optimizing Blends with Sharpe/(GSD^x)||Date: 11/18/2007 5:57 PM|
|Author: StevnFool||Number: 204040 of 254100|
Forgive me if you know this already, but I am not sure if you fully understand the logic behind the Sharpe Ratio.
First, I assume you appreciate that for any strategy, you can increase or decrease the CAGR and GSD by adjusting your leverage (cash or margin).
The Sharpe Ratio was constructed in such a way (with one simplification - i.e. that the interest paid for margin is the same as the interest received for cash) that irrespective of the leverage employed on a given strategy, the Sharpe Ratio remains the same.
If you feel there is a max level of volatility that you can live with - say a GSD of 20 - then the way to maximize your CAGR is to find the strategy with the highest Sharpe Ratio and adjust the leverage to give you a GSD of 20.
I hope I have explained this sufficiently well that you can see that maximizing Sharpe is the best way to realise your goal of maximizing CAGR within your volatility tolerance.
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