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Manager skill and portfolio size with respect to a benchmark
Author(s) -
Bolshakov Andrei,
Chincarini Ludwig B.
Publication year - 2020
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12210
Subject(s) - benchmark (surveying) , portfolio , project portfolio management , set (abstract data type) , post modern portfolio theory , econometrics , computer science , replicating portfolio , portfolio optimization , index (typography) , investment strategy , application portfolio management , modern portfolio theory , variance (accounting) , actuarial science , economics , microeconomics , financial economics , accounting , profit (economics) , management , geodesy , project management , world wide web , programming language , geography
Investment managers often manage a portfolio with respect to a benchmark. Typically, they use a mean‐variance optimization framework to maximize the information ratio of their portfolio. We develop an unconventional approach to this question. Given a set of assumptions, we ask what optimal percentage of the benchmark stocks the portfolio manager should select. This optimal portfolio depends on Fisher's and Wallenius's noncentral hypergeometric distributions. We find that the optimal selectivity of a benchmark universe varies from 50% to 80%. These results are provocative, given that many enhanced index portfolio managers select a low percentage of the benchmark universe.