Portfolio Optimization Under Tracking Error and Weights Constraints

Isabelle G. Bajeux-Besnainou, Riadh Belhaj, Didier Maillard, Roland Portait
2007 Social Science Research Network  
We thank Alexandre Baptista for useful comments. Abstract This article addresses the problem of an active portfolio manager whose performances are assessed against a benchmark and who must comply with a weights constraint. This situation is frequently encountered, in particular because the funds are often committed by their own prospectus to a minimum (or maximum) portfolio concentration. We characterize the optimal asset allocation which depends on the targeted ex ante Tracking Error and on
more » ... weights constraint. We analyze the implications of the weights constraint on the manager's performance and on the relevance of performance measures such as the Information Ratio. In particular, we obtain that, due to the weights constraint, at the optimum, the Information Ratio often decreases when the manager is free to deviate more from the benchmark.
doi:10.2139/ssrn.963997 fatcat:ngo5eelcbnap7ovj3v5jck6fei