Abstract
A portfolio replication approach is used to determine the implied cost of risk for a client's portfolio. This allows us to quantify with a single number, the extent a long-only investment manager is delivering on the twin goals of (1)~Sharpe ratios as high as possible, and (2) having actual risk as close as possible to target risk. A CAPM-like world for credit portfolios is assumed: idiosyncratic risk may be diversified away and only the remaining systematic risk is priced. The broad idea is however more widely applicable.
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