REU 2010 – Sharpe Ratio Versus the Information Ratio: Capturing Minimum Variance Portfolios

Traditional portfolio theory predicts that if a stock carries additional risk it also promises higher levels of expected returns. Clark, de Silva, and Thorley (2006) and Blitz and Vliet (2007) show that in regional and global contexts low volatility stocks outperform high volatility stocks and have a higher realized Sharpe ratio. The Sharpe and Information ratios are measures of excess return per unit of risk relative to the risk-free rate or one’s investment universe benchmark, respectively. We construct a variety of portfolios based on ratio rankings and compare future returns. Ultimately, the performance of these portfolios will help test whether the customary focus on benchmark-driven performance within delegated asset-management creates exploitable investment opportunities.