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Diversification & Sharpe

AQR CapitalCitadel

Two uncorrelated strategies each have a Sharpe ratio of 1 and the same volatility. If you allocate equally to both, what is the combined Sharpe ratio? (Round to 2 decimals.)

Approach

Returns add, variances add (uncorrelated).

Sharpe improves by √(number of independent bets).

Answer

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The answer is 1.41. Sign in free for the full worked solution and to check your own answer.