Dubrovnik, Croatia
Another ratio used to measure portfolio return vs. risk is the Information Ratio. Check this site for one definition.
http://en.wikipedia.org/wiki/Information_ratio
The following site gives the reader a comparison between the Sharpe Ratio and the Information Ratio.
http://seekingalpha.com/article/63911-clarifying-the-information-ratio-and-sharpe-ratio
I have software that permits me to calculate the information ratio from alpha and standard deviation. Eventually, I plan to provide this information for the AA-Mosaic Portfolio. If the Information Ratio is positive, then we know the portfolio manager is adding value to the portfolio.
Photograph: Oregon Coast
While the AA-Mosaic Portfolio continues to maintain a commanding lead over its VTSMX benchmark, the percentages are not all that meaningful as they swing wildly with any volatility in the market. At the close of 2/28/2008, the IRR for the portfolio showed a slight gain of 0.9% while the VTSMX benchmark was lagging with a negative -19.4%. The VFINX or S&P 500 index is negative 19.3%. Performing a bit higher is the total international index (VGTSX) at negative 6.8%.
It is encouraging to see a diversified portfolio maintain this lead, knowing full well the gap will likely close as the different asset classes revert toward their mean value. Nevertheless, we do expect the AA-Mosaic Portfolio to perform better than the VTSMX without taking on too much additional risk.
Photograph: 1925 Doble
Look for a series of posts focusing on Active vs. Passive investing. Most of this material comes from an anonymous article I found in my “Asset Allocation” file.
