How To Recognize Alpha Potential In Active Equity Portfolios
The article discusses the evolving approach to recognizing alpha potential in active equity portfolios. It emphasizes the importance of understanding the standard deviation of excess returns, known as tracking error (TE), in evaluating portfolio performance. The authors suggest that not all active risk is equal and that different strategies may appeal to various investor goals.
- ▪Chasing performance by deviating from a benchmark has long been the hallmark of active managers.
- ▪Tracking error (TE) measures a portfolio’s active return minus the return of its benchmark.
- ▪High TE strategies can play an important role for those pursuing differentiated, style-driven alpha.
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