Investments, tenth edition

   Forecasts of Alpha Values and Extreme Portfolio Weights 

 The overriding impression from  Spreadsheet 27.1  is the apparently meager performance 

improvement: Table D of the spreadsheet shows that  M -square increases by only 19 basis 

points (equivalent to an improvement of .0136 in the Sharpe ratio). Notice that the Sharpe 

ratio of the active portfolio is inferior to that of the passive portfolio (due to its large 

standard deviation) and hence its  M -square is actually negative. But the active portfolio 

is mixed with the passive portfolio, so total volatility is not its appropriate measure of 

risk. When combined with the passive portfolio, it does offer some improvement in per-

formance, albeit quite modest. This is the best that can be had given the    alpha  values