Investment strategy performance under tracking error constraints
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DOIhttp://dx.doi.org/10.21511/imfi.16(1).2019.19
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Article InfoVolume 16 2019, Issue #1, pp. 239-257
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Recent (2018) evidence identifies the increased need for active managers to facilitate the exploitation of investment opportunities found in inefficient markets. Typically, active portfolios are subject to tracking error (TE) constraints. The risk-return relationship of such constrained portfolios is described by an ellipse in mean-variance space, known as the constant TE frontier. Although previous work assessed the performance of active portfolio strategies on the efficient frontier, this article uses several performance indicators to evaluate the outperformance of six active portfolio strategies over the benchmark – subject to various TE constraints – on the constant TE frontier.
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JEL Classification (Paper profile tab)C52, G11
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References32
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Tables1
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Figures10
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- Figure 1. (a) Efficient frontier, TE frontier and constant TE frontier and (b) efficient frontier, TE frontier and constant TE frontier and capital market line (CML) in mean/standard deviation space
- Figure 2. TE frontier, constant TE frontier and portfolio strategies
- Figure 3. Intra-correlation and diversification ratio subject to a TE = %V
- Figure 4. The empirical identification of applying brute force mathematics on the MD and MIC portfolios to be constrained by TE
- Figure 5. (a) Loci of the six portfolio strategies with respect to changes in their risk/return relationships for increasing TEs and (b) an enlarged section of Figure 4(a)
- Figure 6. Performance evaluation of the six portfolio strategies with respect to their (a) Sharpe ratios and (b) M2 ratios for incremental increases in TE
- Figure 7. (a) Performance of the six portfolio strategies with respect to their IRs and (b) correlation of benchmark and each strategy’s returns, as a function of TE
- Figure 8. The loci of possible (a) Sharpe ratios, (b) M2 ratios and (c) IRs – as a function of portfolio risk – for increasing TEs
- Figure 9. The loci of possible (a) Sharpe ratios, (b) M2 ratios and (c) IRs – as a function of portfolio return – for increasing TEs
- Figure 10. Explanation of performance ratio plateaus as TE →9%→15%→18%. The efficient frontier is the darker grey line to which the CML is tangent
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- Table 1. Stylized input data
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Feasible portfolios under tracking error, β, α and utility constraints
Michael Daly , Michael Maxwell , Gary van Vuuren
doi: http://dx.doi.org/10.21511/imfi.15(1).2018.13
Investment Management and Financial Innovations Volume 15, 2018 Issue #1 pp. 141-153 Views: 1219 Downloads: 246 TO CITE АНОТАЦІЯThe investment nous of active managers is judged on their ability to outperform specified benchmarks while complying with strict constraints on, for example, tracking errors, β and Value at Risk. Tracking error constraints give rise to a tracking error frontier – an ellipse in risk/return space which encloses theoretically possible (but not necessarily efficient) portfolios. The β frontier is a parabola in risk/return space and defines the threshold of portfolios subject to a specified β requirement. An α - TE frontier is similarly shaped: portfolios on this frontier have a specified TE for a maximum TE. Utility and associated risk aversion have also been explored for constrained portfolios. This paper contributes by establishing the impossibility of satisfying more than two constraints simultaneously and explores the behavior of these constraints on the maximum risk-adjusted return portfolio (defined arbitrarily here as the optimal portfolio).
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Financial risks of the stock market: opportunities and specifics of their insurance
Inna Shkolnyk 
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Eugenia Bondarenko ,
Ievgen Balatskyi
doi: http://dx.doi.org/10.21511/ins.10(1).2019.03
Insurance Markets and Companies Volume 10, 2019 Issue #1 pp. 26-35 Views: 884 Downloads: 262 TO CITE АНОТАЦІЯThe Ukrainian stock market is rated as an emerging market, which is characterized by high profitability and higher risk level as compared to developed economies. Securities transactions on the Ukrainian stock market are accompanied by stable uncertainties. Moreover, insurance is the most effective way to reduce financial risks and their negative effects. Given the current economic and political instability, financial risk insurance can ensure the economic performance of business entities and stimulate their further economic development. Financial risk insurance is the liability insurance in its nature, but its terms are often included in property insurance. This insurance sector has considerable facilities, which require activation of new insurance products that will be able to protect individual and institutional investors. Insurance and stock markets are direct competitors for limited investor resources, including strategic sources such as temporarily free institutional investor funds and household savings. In general, although there is a significant interaction between the insurance and other financial markets in Ukraine, it is hardly realized at all, unlike foreign economies, where it is used to its maximum. With the development of the insurance culture of the population and insurance in general, the relevance of insurance services in a high-risk segment like the stock market increases. The article harmonizes types of financial risks arising on the stock market with the methods of their leveling (insurance, hedging, diversification, etc.), determines the risk factors of the investor in the stock market, and specifies the professional risks of financial institutions. For the Ukrainian stock market participants, the use of two types of insurance coverage, namely, Bankers Blanket Bond and Financial Institution Professional Indemnity, is proposed.
