Sharpening Fixed-Income Portfolio Allocations

These Sharpe-ratio-optimized portfolios should prompt investors to review their own bond sector allocations.

Does the risk outweigh the reward, or is the reward worth the risk? That’s what the Sharpe ratio helps investors understand to optimize their fixed-income portfolios. To enhance portfolio construction using modern portfolio theory, investors can take greater account of correlations across asset classes (especially within fixed income) and learn what the risk: reward ratio is for their portfolio.

This paper uses Morningstar index data to present a series of Sharpe-optimized portfolios to help investors strike the right balance between risk and reward.