Expanding the benchmarked equity portfolio management paradigm

Hamza Bahaji, Stephanie Ridon and Emmanuel Bourdeix propose a tracking error driven allocation approach applicable to a broad equity universe

Most institutional equity investment policies are bound by benchmarking. These constraints have fuelled significant demand for benchmark-driven equity portfolio allocation strategies during the past few decades, including implicit or explicit mandates to maximise the information ratio (IR). Widely used industry practices rely on tactical approaches bordered by a deviation risk budget that translates into tracking error (TE) targets.

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