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Notes on Fano Ratio and Portfolio Optimization

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  • Zura Kakushadze
  • Willie Yu

Abstract

We discuss - in what is intended to be a pedagogical fashion - generalized "mean-to-risk" ratios for portfolio optimization. The Sharpe ratio is only one example of such generalized "mean-to-risk" ratios. Another example is what we term the Fano ratio (which, unlike the Sharpe ratio, is independent of the time horizon). Thus, for long-only portfolios optimizing the Fano ratio generally results in a more diversified and less skewed portfolio (compared with optimizing the Sharpe ratio). We give an explicit algorithm for such optimization. We also discuss (Fano-ratio-inspired) long-short strategies that outperform those based on optimizing the Sharpe ratio in our backtests.

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  • Zura Kakushadze & Willie Yu, 2017. "Notes on Fano Ratio and Portfolio Optimization," Papers 1711.10640, arXiv.org, revised Apr 2018.
    • Handle: RePEc:arx:papers:1711.10640
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    References listed on IDEAS

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    10. Zura Kakushadze, 2016. "On Origins of Bubbles," Papers 1610.03769, arXiv.org, revised Jul 2017.
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    13. Zura Kakushadze, 2016. "101 Formulaic Alphas," Papers 1601.00991, arXiv.org, revised Mar 2016.
    14. Zura Kakushadze & Willie Yu, 2016. "Statistical Risk Models," Papers 1602.08070, arXiv.org, revised Jan 2017.
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    Cited by:

    1. Zura Kakushadze & Willie Yu, 2018. "Betas, Benchmarks and Beating the Market," Papers 1807.09919, arXiv.org.
    2. A. V. Kuliga & I. N. Shnurnikov, 2024. "Turnover of investment portfolio via covariance matrix of returns," Papers 2412.03305, arXiv.org.

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