The PortScenInfoRatioA.xlsx Model

Portfolio Optimization with the Information Ratio as the Risk Measure

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Maximize the Information ratio of a portfolio, using the scenario approach for describing randomness.

A portfolio has a high information ratio if its expected return is high relative to the benchmark, but also tends to

move (be correlated) with the benchmark.

The correlation with the bench mark is from having a small tracking error when maximized.

Tracking error is the standard deviation of the difference between the portfolio returns and the benchmark returns.

The information ratio is:

( Avg return of portfolio - average return of the benchmark)/(Tracking error + epsilon);

The epsilon is added to the denominator the case where optimal portfolio has a zero tracking error.

Keywords:

Portfolio | Benchmark Portfolio | Scenario | Risk Management | Information Ratio | Tracking error |