Shouldn't we be looking at the Sharpe Ratio (return/risk) for Value Investing rather than absolute returns since we can never diversify across the entire small capitalization market? - Seedly

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Asked by Anonymous

Asked on 07 Jul 2018

Shouldn't we be looking at the Sharpe Ratio (return/risk) for Value Investing rather than absolute returns since we can never diversify across the entire small capitalization market?

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Alvin Chow
Alvin Chow
Level 2. Rookie
Answered on 11 Jul 2018

My friend has backtested a deep value investing strategy and got a Sharpe ratio more than 1. So it isn't true that it was higher risk with small caps, even though I don't believe using Sharpe Ratio as a good way to measure risk taking. Even equating volatility to risk is debatable. But that's for the academics and practitioners to fight it out.

http://treeofprosperity.blogspot.com/2014/06/back-testing-cnav-like-portfolio-using.html

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