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Portfolio Improvement by Using the Sharpe Rule and Value‐at‐Risk
Author(s) -
Yu Kwok Wai,
Yang Xiao Qi,
Wong Heung
Publication year - 2007
Publication title -
pamm
Language(s) - English
Resource type - Journals
ISSN - 1617-7061
DOI - 10.1002/pamm.200700221
Subject(s) - sharpe ratio , portfolio , diversification (marketing strategy) , post modern portfolio theory , portfolio optimization , rate of return on a portfolio , econometrics , economics , stock (firearms) , financial economics , expected return , stock market , modern portfolio theory , actuarial science , computer science , replicating portfolio , business , engineering , geography , mechanical engineering , context (archaeology) , archaeology , marketing
This study discusses the applications of the Sharpe rule in portfolio measurement and management. It proposes that a portion of the portfolio value should be invested in some other assets for portfolio improvement. By applying the Sharpe rule, it can be determined that new stocks are worthy of adding to the old portfolio if they satisfy a condition, in which the average return rate of these stocks is greater than the return rate of the old portfolio multiplied by the sum of the elasticity of the VaR and 1. One attraction of our approach is diversification. A numerical example in the Hong Kong stock market is presented for illustration. Some experimental results show that a new portfolio with the 'highest' Sharpe ratio can be obtained by adding only a few new assets. (© 2008 WILEY‐VCH Verlag GmbH & Co. KGaA, Weinheim)