Notes on Fano Ratio and Portfolio Optimization

Zura Kakushadze and Willie Yu

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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.

Date: 2017-11, Revised 2018-04
New Economics Papers: this item is included in nep-rmg
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Published in Journal of Risk & Control 5(1) (2018) 1-33

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1711.10640

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