Risk Control Mechanism of Active Portfolio Investment with Tracking Error Constrains

Risk Control Mechanism of Active Portfolio Investment with Tracking Error Constrains


Author:Yi Fang,Yishan Zhang Journal:Chinese Journal of Management Science (Chinese)  Date:2006(4)

Keywords Tracking error; information ratio;the total risk; benchmark portfolio

Abstract

TEV (Tracking Error Volatility) Optimization which is widely used in active portfolio management has an inherent flaw. The assets of investors have greater risk, owing to the actions of managers. Jorion (2003) noted that C-TEV (Constant-TEV) Optimization can improve performance of the portfolio. The paper concentrates on TEV Optimization and C-TEV Optimization. It explores the conclusions of Jorion is not right-on and discusses efficiency, cost, role of benchmark and risk preference, and designs a more effective risk control mechanism.


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