Letters to the Editor
To The Editors:
After reading the sidebar entitled Risk-Adjusted Returns [found in the article Whats Up? AAIIs Shadow Stock Portfolio, January 2004 AAII Journal and in the Model Portfolios area], Im a bit confused by James Cloonans approach to the question: What does risk matter?
To date, Ive referred to risk-adjusted return as the Sharpe ratio. By expressing an assets return per unit of risk, it provides an objective indication of an assets risk-adjusted performance. In short, it facilitates the side-by-side comparison of dissimilar assets by considering risk as well as return.
Im not certain the Model Portfolio discussion of risk-adjusted return reflects the simplicity offered by the Sharpe ratio. The examples cited would tend to be found in discussions of portfolio construction where the effect of debt and riskless assets is addressed within the context of how those variables affect portfolio return and variance. The original question is right on target. I dont think the paragraphs that follow adequately addre
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