STATISTICAL DEFINITIONS
Sharpe Ratio
The level of portfolio return that is possible beyond the safety of T-Bills for the volatility risk taken to get there. Like a barometer, the greater the number, the fairer the prospects for good weather.
Mathematical Reliability
Mathematical reliability is not explicitly included in the Hunter Reliability Ratio. This factor was eliminated to avoid arbitrary weighing of information, such as the number of periods since inception. However, the ratio is believed to be a realistic comparative reliability tool for managers with greater than 40 periods of data (typically, monthly net performance of managers).
Standard Deviation
Standard Deviation shows how tightly a set of returns is clustered around the mean of those same returns. Standard deviation is applied to the annual rate of return of an investment, to measure the investment's volatility, or "risk". A higher standard deviation is often interpreted as higher volatility, and therefore may present a higher risk. In comparison, a lower standard deviation would likely be an indicator of more stability. The most consistent performance will usually be the set of returns with the lowest standard deviation.
Data
Typically, monthly net performance data of manager is used as input for calculating the Reliability ratio
ANSWERS
Manager A is the "best fit" manager, with very low Blend AnxietyTM and compatible Diversification (hovering around 0).
Manager D, with his/her inordinately high Blend AnxietyTM and high correlation to the Russell 2000 Index, is most likely a small cap/long-only manager posing as an Event Driven manager.
INTELLECTUAL PROPERTY
Strategic Capital Network LLC
Black Litterman Portfolio
* The Intuition Behind Black-Litterman Model Portfolio, Goldman Sachs, Dec. 1999
Real Power of Real Options
1) The Real Power of Real Options, Keith J. Leslie and Max P. Michaels, The Mckinsey Quarterly, 1997 Number 3, p.16.
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