Kyle

Looking For Value in Active Management

On a second note, I am curious where the basis for the chosen slope of the risk return line is derived from. Historical data, if so what data? I am also curious why there is no risk free rate of return assumed. Thanks

Looking For Value in Active Management

It seems that all mutual funds / etfs would have this same issue. A mutual fund will inherently, whether they have done it on purpose or not, add value on a risk return basis by adding together individual stocks with correlations that are less than one. Without doing the math, but I'm pretty sure it can be proven, any combination of at least 2 stocks that have a non-one correlation will have a higher return on a risk adjusted basis, than any individual stock; using the model of all equities lying on a line of risk vs return, which is what QPP does, I believe.

It seems placing stocks and mutual funds on the same risk return line is invalid. Also stocks / mutual funds, if the markets are truly efficient, will not have returns only based on risk, but also on ability to have low correlations to other investments. Any investment with an inherently low correlation should have a lower risk adjusted return... if the markets where truly efficient.