Investments, tenth edition

 Example  24.3 

Changing Portfolio Risk 

 What happened in Example 24.3? The 

shift of the mean from the first four quar-

ters to the next was not recognized as a 

shift in strategy. Instead, the difference 

in mean returns in the 2 years added to 

the  appearance  of volatility in portfolio 

returns. The active strategy with shift-

ing means appears riskier than it really 

is and biases the estimate of the Sharpe 

measure downward. We conclude that for 

actively managed portfolios it is helpful 

to keep track of portfolio composition and 

changes in portfolio mean and risk. We 

will see another example of this problem 

in the next section, which deals with mar-

ket timing.   

Rate of Return (%)

Quarter

27

3

−1

−9