Tracking Error and Active Portfolio Management

Nadima El-Hassan () and Paul Kofman
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Paul Kofman: Department of Finance, University of Melbourne

No 98, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Persistent bear market conditions have led to a shift of focus in the tracking error literature. Until recently the portfolio allocation literature focused on tracking error minimization as a consequence of passive benckmark management under portfolio weights, transaction costs and short selling constraints. Abysmal benchmark performance shifted the literature's focus towards active portfolio strategies that aim at beating the benchmark while keeping tracking error within acceptable bounds. We investigate an active (dynamic) portfolio allocation strategy that exploits the predictability in the conditional variance-covariance matrix of asset returns. To illustrate our procedure we use Jorion's (2002) tracking error frontier methodology. We apply our model to a representative portfolio of Australian stocks over the period January 1999 through November 2002.

Pages: 24 pages
Date: 2003-06-01
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (20)

Published as: El-Hassan, N. and Kofman, N., 2003, "Tracking Error and Active Portfolio Management", Australian Journal of Management, 28(2), 183-207.

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Journal Article: Tracking Error and Active Portfolio Management (2003)
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