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| Author: | Clarke, R. Silva, H. de Thorley, S. |
| Title: | Portfolio Constraints and the Fundamental Law of Active Management |
| Journal: | Financial Analysts' Journal
2002 : SEP-OCT, VOL. 58:5, p. 48-66 |
| Index terms: | PORTFOLIO MANAGEMENT LAW FINANCE PERFORMANCE APPRAISAL |
| Language: | eng |
| Abstract: | Active portfolio management is typically conducted within constraints that do not allow managers to fully exploit their ability to forecast returns. Constraints on short positions and turnover, for example, are fairly common and materially restrictive. Other constraints, such as market-capitalization and value-growth neutrality with respect to the benchmark or economic-sector constraints, can further restrict an active portfolio's composition. The authors derive ex ante and ex post correlation relationships that facilitate the performance analysis of constrained portfolios. The ex ante relationship is a generalized version of a previously developed "fundamental law of active management" and provides an important strategic perspective on the potential for active management to add value. |
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