Notes on Fano Ratio and Portfolio Optimization

Zura Kakushadze and Willie Yu

Journal of Risk & Control, 2018, vol. 5, issue 1, 1-33

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.

Keywords: Portfolio; Stocks; Equities; Optimization; Sharpe Ratio; Fano Ratio; Risk; Return; Expected Return; Alpha; Specific Risk; Idiosyncratic Risk; Factor Loadings; Factor Covariance Matrix; Risk Factor; Volatility; Variance; Covariance; Correlation; Bounds; Trading Costs; Constraints; Regression; Weights. (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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