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Author: elann Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 255673  
Subject: Re: Optimizing Blends with Sharpe/(GSD^x) Date: 11/17/2007 7:52 PM
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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.

That's why we have CAGR in the numerator of the Sharpe ratio. A high CAGR with a low level of uncertainty is what we're shooting for, and that is exactly the Sharpe ratio.

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

No. A high CAGR is not necessarily a smooth CAGR. You're creating an incorrect rule by extending the fact that, given two series with equal average returns, the series with lower volatility will produce a higher CAGR.

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