Notes on Fano Ratio and Portfolio Optimization
Portfolio Management
2018-04-12 v2 Risk Management
Abstract
We discuss - in what is intended to be a pedagogical fashion - generalized "mean-to-risk" ratios for portfolio optimization. The Sharpe ratio is only one example of such generalized "mean-to-risk" ratios. Another example is what we term the Fano ratio (which, unlike the Sharpe ratio, is independent of the time horizon). Thus, for long-only portfolios optimizing the Fano ratio generally results in a more diversified and less skewed portfolio (compared with optimizing the Sharpe ratio). We give an explicit algorithm for such optimization. We also discuss (Fano-ratio-inspired) long-short strategies that outperform those based on optimizing the Sharpe ratio in our backtests.
Keywords
Cite
@article{arxiv.1711.10640,
title = {Notes on Fano Ratio and Portfolio Optimization},
author = {Zura Kakushadze and Willie Yu},
journal= {arXiv preprint arXiv:1711.10640},
year = {2018}
}
Comments
29 pages; a few trivial typos corrected, no other changes