example 19 page 46 volume 3 CFAI text
I know that if market fully segmented , correlation of asset class with market is 1 because it correlate with themselve.
but i’m curious why in example they use GIM as market return instead of each asset class market return??
(by using RPi = STDi * Sharp ratio of GIM (instead Sharp ratio of asset class market return)
How can each asset class return equal to GIM??
thank you in advance
It is Singer Terhaar (not Tarsha)
Formula: Fully Integrated: RPi = Rhoi * Sigmai * SRGIM
For Fully segmented Rhoi = 1. - so RPi = Sigma I * SRGIM.
ok, if you use Shape ratio of GIM as Sharp ratio of segmented market for fulll segmented return ,and let’s correlation = 1
you imply segmented market correlate to GIM at 1 ???
why not use shape ratio of segmented market ?
“To address the task of estimating the risk premium for the case of complete mar- ket segmentation, we must first recognize that if a market is completely segmented, the market portfolio in Equations 9 and 10 must be identified as the individual local market. Because the individual market and the reference market portfolio are identi- cal, ρi,M in Equation 10 equals 1.”
from the book.