Portfolios - EDHEC-Risk

Tracking the Tracking Error
• Even with a combination of a minimum volatility portfolio and a
maximum Sharpe ratio portfolio, extreme tracking error risk
remains substantial.
• This extreme relative risk is a severe concern for a Chief
Investment Officer who has made the choice of adopting an
alternative weighting scheme.
When such underperformance occurs with active managers, the failure of a
third-party manager, which is a risk inherent to the very logic of the delegation
process of portfolio management, typically translates into the termination of
the manager.
In the case of underperformance of an alternative ti equity index, however, it
would be difficult for the CIO to blame anyone but himself/herself for the
selection of this index.
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