Article ID: | iaor201112334 |
Volume: | 34 |
Issue: | 2 |
Start Page Number: | 295 |
End Page Number: | 330 |
Publication Date: | Jun 2011 |
Journal: | Journal of Financial Research |
Authors: | Portait Roland, Bajeux-Besnainou Isabelle, Belhaj Riadh, Maillard Didier |
Keywords: | portfolio optimization |
The performance of active portfolio managers who must comply with a weights constraint is often assessed against a benchmark. The weights constraint is common as the funds are committed by their own prospectus to a minimum (or maximum) portfolio concentration. We characterize the optimal asset allocation and analyze the implications of the weights constraint on the manager's performance and on the relevance of the information ratio. We obtain that because of the weights constraint, at the optimum, the information ratio often decreases when the manager is free to deviate more from the benchmark.