I am using returns and index data to test for optimal sharpe ratios. I do not own any units and have not invested capital. What should I set the units and capital values to in this instance?
When testing with data we usually set the inital weightings equal.
For returns this can one unit per asset. For index price we need to enter a nominal capital amount and then use the equal weighting button to calculate the units from the last known price to equalize the weightings.
I would like to use return data to test what weighting I should invest in each asset to maximise the sharpe ratio.
Basically I want to a wide variety of sharpe ratios for different weightings so I can get an idea of the diversification benefits. Does the spreadsheet offer this option?
When we start with weightings it can be existing portfolio structure or for testing just equal weights.
When the optimization process is run, it calculates sets of weightings that lie on the efficient frontier. The one with the highest Sharpe ratio is the one that has the highest ratio of return to risk volatility. However, we can also select and view any of the other weighting sets that were calculated during the optimization on the table with sort options to the right of the results. A button is provided to load a selected weighting set which could, for example, reduce the return in order to have a lower level of risk (better diversification). The newly selected weightings are then loaded with all metrics and shown where that portfolio lies on the efficient frontier.
