Active or passive portfolio: A tracking error analysis under uncertainty theory

Tingting Yang and Xiaoxia Huang

International Review of Economics & Finance, 2022, vol. 80, issue C, 309-326

Abstract: The active and passive portfolio managements are two different investment strategies in the industry and there is always a debate on which strategy to adopt. This paper tells investors how to choose strategies according to their risk attitude to well manage their portfolios under uncertainty theory where returns of stocks are estimated by experts and treated as uncertain variables. First, an uncertain tracking error constrained (UTEC) model is proposed to actively manage portfolios and its analytical solution is provided. As an improvement of UTEC model, this paper adds a new constraint and puts forward a new UTEC model. Then to help investors perceive how to choose between the active and passive portfolios, this paper defines a performance value which uses portfolios’ expected value, standard deviation and investors’ risk attitude to score the portfolios. Results of analysis show that investors’ risk attitude affects investors’ choice of active or passive portfolio. Moreover, the risk attitude also affects the choice of UTEC portfolio or the new UTEC portfolio. Finally, this paper illustrates these researches with numerical examples.

Keywords: Portfolio selection; Tracking error; Uncertainty theory; Risk attitude (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:80:y:2022:i:c:p:309-326

DOI: 10.1016/j.iref.2022.02.043

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