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Calculating Value Added (by Fund Managers)

June 3, 2016

Given:

IR = annualized residual return / annualized residual risk = α/ɯ

risk aversion of investor = λ

Value Added = α – (λ * ɯ^2)

Maximum Value Added = IR^2 / 4λ

at Optimal Level of Risk = ɯ* = IR/2λ

 

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