Facilitating Portfolio Construction Using Ex-Ante Information Ratios and Maximum Sharpe Ratios

Investors should consider Sharpe ratios and correlations together when adding a new fund to their existing portfolio. The ex-ante information ratio (also known as the appraisal ratio) is effective in informing this decision. However, a maximum Sharpe ratio calculation is equally effective in this decision while providing the additional benefit of producing optimal portfolio weights for the combined portfolio. In this article, we demonstrate how to compute these measures to help facilitate portfolio construction.