Exploring the drivers of tracking error constrained portfolio performance

Artikel

Maximising returns is often the primary goal of asset management but managing and mitigating portfolio risk also plays a significant role. Successful active investing requires outperformance of a benchmark through skillful stock selection and market timing, but these bets necessarily give rise to risk. The risk, relative to the benchmark, is the tracking error and active managers are constrained by investment mandates including a restriction on tracking error. The locus of possible portfolio risks and returns, constrained by a tracking error is elliptical, and the main axis slope's sign and magnitude varies under different market conditions. How these variations affect portfolio performance is explored for the first time. We find that changes in main axis slope (magnitude and sign) acts as an early indicator of portfolio performance and could therefore be used as another risk management tool.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Cogent Economics & Finance ; ISSN: 2332-2039 ; Volume: 7 ; Year: 2019 ; Issue: 1 ; Pages: 1-15

Classification and Topics

• Classification: Wirtschaft ; Model Construction and Estimation ; Criteria for Decision-Making under Risk and Uncertainty ; Portfolio Choice; Investment Decisions ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
• Subject: maximum diversification ; tracking error frontier ; main axis slope ; portfolio optimisation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gunning, Wade ; Van Vuuren, Gary
• Event: Veröffentlichung
• (who): Taylor & Francis
• (where): Abingdon
• (when): 2019

Further information

• DOI: doi:10.1080/23322039.2019.1684181
• Handle: http://hdl.handle.net/10419/270693
• Last update: 10.03.2025, 11:44 AM CET