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Re: Follow Up Question about ETFs
Bonds and stocks both have similar if not identical expected sharpe ratios (expected excess return/expected volatility). they have similar and close to identical historical sharpe ratios (actual excess returns/actual volatility).
mispricings in the market shouldn't matter in terms of allocating to a passive portfolio that you will not "trade" and just let sit while you increase the value of your holdings through collecting the risk premia (excess returns) that are transfered to holders of risky assets from the issuers. corporate bonds likely returned less in absolute terms than stocks, but very close if not identical in risk adjusted terms(sharpe ratio). corporate bonds i don't think provide as much diversification as, say, nominal bonds since the drivers of returns of corporate bonds have a great deal of overlap with the drivers of returns of equities. constructing an optimal passive portfolio requires a ton of work and jively gives you the easiest way to think about it if you limit yourself to a) no leverage, and b) solely stocks and bonds. the picture gets more complicated as you add REITS, CCFs (commodities delevered to risk level of probably around equities or maybe even bonds), TIPS (hugely valueable for their diversification purposes). i've posted numerous times about this type of portfolio, but, overall, if you want the highest sharpe ratio avaialble, you have to put in the work to do this. otherwise, your expected risk adjusted returns are limited to the .35 area (the best you can hope for with jively type allocations). hope this helps, Barron |
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