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Letters to the Editor

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To the Editors:

After reading “Model Stock Portfolio: Beating the Benchmark Is Nice, But a Loss Isn’t,” in the April 2009 AAII Journal, I think there are some errors in Figure 1. In particular, I think the three-year risk-adjusted return is wrong. As I understand it, the RiskGrade is higher for higher risk. If that is the case, then the risk-adjusted return for the Shadow Stock portfolio and the Vanguard Small Cap Index fund should be worse than unadjusted, not better! (For some reason, the risk-adjusted return for the Vanguard 500 Index fund was correctly calculated.)

This is frequently a problem with formulas that assume positive returns. When the returns are positive, everything works correctly but when they are negative, the formula must be modified. As a result, the risk-adjusted three-year return for the Shadow Stock portfolio would be –31.1%. Not a pretty picture!

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