We compare the Sharpe ratios of investment funds which combine one riskless and one risky asset following: i) timing strategies which forecast excess returns using simple regressions; ii) a strategy which uses multiple regression instead; and iii) a passive allocation which combines the funds in i) with constant weightings. We show that iii) dominates i) and ii), as it implicitly uses the linear forecasting rule that maximises the Sharpe ratio of actively traded portfolios, but the relative ranking of i) and ii) is generally unclear. We also discuss under what circumstances the performance of ii) and iii) coincides.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2088.
Find related papers by JEL classification: G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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