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3 times its previous value a α σ e 50714768 00343

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is 0.3 times its previous value: A = α / σ (e)= –5.07/147.68 = –0.0343 and A 2 =0.00118 8-12
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8-13 Hence, the square of Sharpe’s measure of the optimized risky portfolio is: S 2 = S 2 M + A 2 = (8/23) 2 + 0.00118 = 0.1222 S = 0.3495 Compare this to the market’s Sharpe measure: S M = 8/23 = 0.3478 The difference is: 0.0017 Note that the reduction of the forecast alphas by a factor of 0.3 reduced the squared information ratio and the improvement in the squared Sharpe ratio by a factor of: 0.3 2 = 0.09
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