These results are based on the return history of actual mutual funds. Take a look at this data on three different investments ranked by their Sharpe Ratios: The Sharpe Ratio is a formula created by William Sharpe that compares returns per unit of risk by dividing excess performance over the risk free rate (cash or t-bills) by the investment’s volatility (standard deviation). More to the point - do risk-adjusted returns matter? Or should they matter to investors? It also begs the question about whether or not the Sharpe Ratio really makes sense as a way to gauge investment performance. The research used here is interesting for data junkies, but it’s tough to say if it’s useful for investors when creating a portfolio. Using the Sharpe Ratio they showed that on a risk-adjusted basis there was no small cap anomaly. Research Affiliates determined that this actually isn’t the case: Past research has shown that small cap stocks have outperformed large cap stocks over longer time frames. One factor they looked into was the small cap anomaly. The firm’s latest piece looks at smart beta and a host of factor investing data. Founder Rob Arnott’s work on fundamental indexing is especially innovative. ![]() Research Affiliates puts out some of the most interesting and thought-provoking research in the investment industry. “Beware of geeks bearing formulas.” – Warren Buffett
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