Portfolio Constraints and Active Mgt

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1、PortfolioConstraintsandtheFundamentalLawofActiveManagementRogerClarke,HarindradeSilva,andStevenThorleyActiveportfoliomanagementistypicallyconductedwithinconstraintsthatdonotallowmanagerstofullyexploittheirabilitytoforecastreturns.Constraintsonshortpositio

2、nsandturnover,forexample,arefairlycommonandmateriallyrestrictive.Otherconstraints,suchasmarket-capitalizationandvalue–growthneutralitywithrespecttothebenchmarkoreconomic-sectorconstraints,canfurtherrestrictanactiveportfolio’scomposition.Wederiveexanteande

3、xpostcorrelationrelationshipsthatfacilitatetheperformanceanalysisofconstrainedportfolios.Theexanterelationshipisageneralizedversionofapreviouslydeveloped“fundamentallawofactivemanagement”andprovidesanimportantstrategicperspectiveonthepotentialforactiveman

4、agementtoaddvalue.Theexpostcorrelationrelationshiprepresentsapracticaldecompositionofperformanceintothesuccessofthereturn-predictionprocessandthe“noise”associatedwithportfolioconstraints.WeverifytheaccuracyoftheserelationshipswithaMonteCarlosimulationandi

5、llustratetheirapplicationwithequityportfolioexamplesbasedontheS&P500Indexasthebenchmark.ostportfoliomanagersappreciatetheTerminologyandNotationfactthatvalueaddedultimatelyThediscussionwillfocusonresidualsecuritydependsontheirabilitytocorrectlyMreturns,ri,

6、theportionofsecurityi’stotalreturnthatforecastsecurityreturns.Managersisuncorrelatedwiththebenchmarkportfolio.Fore-workhardtocreatevaluableinformationaboutcastedresidualsecurityreturns,αi,aretheportfoliofuturereturnsbutmaynotpayasmuchattentionmanager’sfor

7、ecastofriforeachofthei=1toNtolimitationsintheportfolioconstructionprocess.securitiesintheportfolio.OurfocusontheresidualConstraintssuchasnoshortsales,industrylimita-portionofsecurityreturns(bothforecastedandtions,andrestrictionsoninvestmentstyleorturn-rea

8、lized)ismotivatedbyanadjustmentfornon-over—alllimitamanager’sabilitytotransferunitybetasinmanagedportfolios,asexplainedinvaluableinformationintoportfoliopositions.WeAppendixA,“FrameworkandNotation.”Wealsointroduceac