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Reason for Why you Obtain a Larger Reward-to-Variability Ratio

Question

Over the next year, expected return on the S&P 500 index (proxy for the optimal risky portfolio), the SMB portfolio, and the HML portfolio are 11%, 6%, and 3%; standard deviation of the returns on the S&P 500 is 27%; risk free return is 2%.

If you invest 80% of your investment budget in an index fund that tracks the S&P 500 and the remainder in the risk-free asset.

If you were to obtain a higher reward-to-variability ratio above, what would that mean for your portfolio.

Summary: This question belongs to financial management and discuses about why you could obtain a larger reward-to-variability ratio than the one computed when invest in an index fund that tracks S&P 500.

Total word count: 35

 

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