The formula to calculate the Equity Optimization is:
\[ EO = \frac{R - R_f}{σ} \]
Where:
Equity optimization is a financial metric used to assess the performance of an investment portfolio relative to its risk. It measures the excess return generated by the portfolio over the risk-free rate, adjusted for the portfolio’s volatility. This metric helps investors understand how effectively their portfolio is performing in terms of risk-adjusted returns, allowing them to make more informed investment decisions. Equity optimization is particularly useful in portfolio management and performance evaluation, as it provides a standardized way to compare different investment strategies and their effectiveness in generating returns relative to the risk taken.
Let's assume the following values:
Using the formula:
\[ EO = \frac{0.10 - 0.02}{0.15} = 0.53 \]
The Equity Optimization is 0.53.
Let's assume the following values:
Using the formula:
\[ EO = \frac{0.12 - 0.03}{0.20} = 0.45 \]
The Equity Optimization is 0.45.
