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Brad Case

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  • ETF Focus: iShares FTSE EPRA/NAREIT North America ETF [View article]
    Thanks for the suggestion, loanaranger.

    The Sharpe [] ratio is the main measure of risk-adjusted performance. (Taking a huge amount of risk, or volatility, in order to get a high return isn't necessarily very smart, but getting the same return with less risk is definitely smart.) The way it's computed is this: from the return on a given asset (such as IFNA) you subtract the return that you could have gotten without taking any risk at all, meaning you subtract the return on one-month Treasury bills. Then you divide that by the volatility of returns, and the ratio you end up with is the amount of return you got PER UNIT of risk you took on.

    The fact that the index tracked by IFNA has produced a Sharpe ratio of 0.502 for 21 years means that its returns have been outstanding relative to the amount of risk that investors took on.

    (The Treynor ratio [] is another measure of risk-adjusted returns.)

    The reason that IFNA offers such a strong diversification benefit is that, like any real estate ETF (or REIT, or REIT mutual fund), it gives investors a way of investing in a different asset class even though they're doing it through the stock market. That means it's a low-cost, high-return way of bringing down the volatility of an investor's portfolio.
    Jan 29, 2011. 01:56 PM | Likes Like |Link to Comment
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