SERVING THE QUANTITATIVE FINANCE COMMUNITY

janickg
Topic Author
Posts: 196
Joined: August 3rd, 2004, 1:13 pm

### Implied Returns

Correct me if I'm wrong, but implied returns are simply returns implied by the respective weights that construct the market/benchmark portfolio?

Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

### Implied Returns

The weights alone dont imply any return. You can imply returns from a fund's over/underweights versus a benchmark. If you have the covariance matrix, decompose the excess return vol into marginal (per factor) vol contribution. Then use the expected/historical/assumed information ratio of the fund mgr to get the return implied from exposure to any one of the factors/sectors. I will let you do the algebra...

janickg
Topic Author
Posts: 196
Joined: August 3rd, 2004, 1:13 pm

### Implied Returns

So basically, you're saying that I'm calculating the returns of assets in a portfolio that would make it optimal based on a given benchmark. So the returns are implied by the benchmark essentially?

Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

### Implied Returns

Yes you are assuming the portfolio manager has positioned himself optimally. Then the returns are implied by the over/underweighting in certain sectors, but also by the info ratio you are assuming.