Hi Ashay, Sharpe and Treynor are both measures of risk-adjusted return, therefore NEITHER is a measure of diversification. Instead, because Treynor's denominator is beta such that its risk metric is systematic risk, Treynor effectively PRESUMES a diversified portfolio and arguably should only be used on approximately those occasions. The Sharpe ratio's denominator is volatility (aka, total risk albeit an imperfect measure of total risk) such that when the portfolio is not well diversified, the Sharpe should be used. Thanks!
@@sagarsonar7671 how can we differentiate between diversified and non diversified portfolio? It's through the correlation measure. Correlation= -1 is well diversified, but in real life it will be in between -1
Yes, thank you for noticing, I did have a formula error (that doesn't manifest during the video while ρ=0). I fixed the formula for portfolio volatility, so it now reads =SQRT(F37^2*$M$10+(1-F37)^2*$M$13+2*F37*(1-F37)*rho_ab*sigma_a*sigma_b). Thank you for your attention to detail!
hi David, thank you very much. Is it possible for you to re-upload the excel file? I think it has been deleted from Dropbox since. I would love to know, how you created the portfolio possibilities curve. Thank you!
hi David, is it possible for you to re-upload the excel file? I think it has been deleted from Dropbox since. I would love to know, how you created the portfolio possibilities curve. Thank you!
Hello Sir, I have a question on the efficient frontier. What I understood that all the portfolios on the efficient frontier plot (that is on the frontier line and below that) are all well diversified. If this is true, then the risk plotted on the x-axis in a way represents the systematic risk. Although we plot the total risk but in substance it is systematic risk because we have already diversified. Pls help with this particular thought. Thank you in anticipation
Hi Kaushik, That is true for the straight-line (ie, including the Rf rate) CML where its linear relationship to volatility will also be linear to beta (and keep in mind, the beta is a beta with respect to the Market Portfolio which is only a single point of tangency at the highest Sharpe ratio). But efficiency and diversification both have degrees! Before the Rf rate (ie, the Green PPC), only the Market Portfolio is "most efficient" (highest Sharpe ratio) and under CAPM theory investors will all seek this "very well (most) diversified Portfolio). If you slice a horizonal line (say at 200% leverage in the Market Portfolio), for a given EXPECTED RETRUN (e.g., 19%) you will intersect the CML at a lower sigma than the green line. Each has the same beta, but the non-CML portfolio is less efficient due to some idiosyncratic volatility. We could imagine a mapping but it's non linear. Both efficiency and diversification have degrees, only the CML is highest efficiency and most diversified. Thanks,
@@bionicturtle Hello David, Thanks for the explanation. You are saying less efficiency between the CML and Non CML portfolio is due to the presence of some degree of idiosyncratic. And if we remove the risk free and only look at the efficient frontier, how can we prove that the market portfolio is the most diversified? By saying that it has highest return per risk unit and therefore it is the most efficient and most diversified. Is that correct?
Is Sharpe ratio or Treynor ratio a better measure of the portfolio diversification?
Hi Ashay, Sharpe and Treynor are both measures of risk-adjusted return, therefore NEITHER is a measure of diversification. Instead, because Treynor's denominator is beta such that its risk metric is systematic risk, Treynor effectively PRESUMES a diversified portfolio and arguably should only be used on approximately those occasions. The Sharpe ratio's denominator is volatility (aka, total risk albeit an imperfect measure of total risk) such that when the portfolio is not well diversified, the Sharpe should be used. Thanks!
Hey I am currently preparing for a frm can drop u phone no. Here please it will be help in studies??
@@sagarsonar7671 how can we differentiate between diversified and non diversified portfolio?
It's through the correlation measure.
Correlation= -1 is well diversified, but in real life it will be in between -1
@@user-st6is9ml4x there is no perfect measure for diversification it's according to the need of portfolio
I love the spreadsheet, but I think the 3rd term of right hand side is not correct. It should be 2*wA*wB*Cov(A,B), where Cov(A,B)=Corr*sdA*sdB
Yes, thank you for noticing, I did have a formula error (that doesn't manifest during the video while ρ=0). I fixed the formula for portfolio volatility, so it now reads =SQRT(F37^2*$M$10+(1-F37)^2*$M$13+2*F37*(1-F37)*rho_ab*sigma_a*sigma_b). Thank you for your attention to detail!
hi David, thank you very much. Is it possible for you to re-upload the excel file? I think it has been deleted from Dropbox since. I would love to know, how you created the portfolio possibilities curve. Thank you!
hi David, is it possible for you to re-upload the excel file? I think it has been deleted from Dropbox since. I would love to know, how you created the portfolio possibilities curve. Thank you!
Hello Sir,
I have a question on the efficient frontier. What I understood that all the portfolios on the efficient frontier plot (that is on the frontier line and below that) are all well diversified.
If this is true, then the risk plotted on the x-axis in a way represents the systematic risk. Although we plot the total risk but in substance it is systematic risk because we have already diversified. Pls help with this particular thought.
Thank you in anticipation
Hi Kaushik, That is true for the straight-line (ie, including the Rf rate) CML where its linear relationship to volatility will also be linear to beta (and keep in mind, the beta is a beta with respect to the Market Portfolio which is only a single point of tangency at the highest Sharpe ratio). But efficiency and diversification both have degrees! Before the Rf rate (ie, the Green PPC), only the Market Portfolio is "most efficient" (highest Sharpe ratio) and under CAPM theory investors will all seek this "very well (most) diversified Portfolio). If you slice a horizonal line (say at 200% leverage in the Market Portfolio), for a given EXPECTED RETRUN (e.g., 19%) you will intersect the CML at a lower sigma than the green line. Each has the same beta, but the non-CML portfolio is less efficient due to some idiosyncratic volatility. We could imagine a mapping but it's non linear. Both efficiency and diversification have degrees, only the CML is highest efficiency and most diversified. Thanks,
@@bionicturtle Hello David,
Thanks for the explanation. You are saying less efficiency between the CML and Non CML portfolio is due to the presence of some degree of idiosyncratic.
And if we remove the risk free and only look at the efficient frontier, how can we prove that the market portfolio is the most diversified?
By saying that it has highest return per risk unit and therefore it is the most efficient and most diversified.
Is that correct?
Is it possible to get the excel worksheet for this please?
A link to the Excel file (XLS) is at the beginning of the video's description above