IDEAS home Printed from https://ideas.repec.org/a/taf/quantf/v2y2002i6p482-486.html
   My bibliography  Save this article

Diversification and generalized tracking errors for correlated non-normal returns

Author

Listed:
  • Mark Wise
  • Vineer Bhansali

Abstract

The probability distribution for the relative return of a portfolio constructed from a subset n of the assets from a benchmark, consisting of N assets whose returns are multivariate normal, is completely characterized by its tracking error. However, if the benchmark asset returns are not multivariate normal then higher moments of the probability distribution for the portfolio's relative return are not related to its tracking error. We discuss the convergence of generalized tracking error measures as the size of the subset of benchmark assets increases. Assuming that the joint probability distribution for the returns of the assets is symmetric under their permutations we show that increasing n makes these generalized tracking errors small (even though n « N). For n » 1 the probability distribution for the portfolio's relative return is approximately symmetric and strongly peaked about the origin. The results of this paper generalize the conclusions of Dynkin et al (Dynkin L, Hyman J and Konstantinovsky V 2002 Sufficient Diversification in Credit Portfolios (Lehman Brothers Fixed Income Research)) to more general underlying asset distributions.

Suggested Citation

  • Mark Wise & Vineer Bhansali, 2002. "Diversification and generalized tracking errors for correlated non-normal returns," Quantitative Finance, Taylor & Francis Journals, vol. 2(6), pages 482-486.
    • Handle: RePEc:taf:quantf:v:2:y:2002:i:6:p:482-486
    DOI: 10.1080/14697688.2002.0000015
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/14697688.2002.0000015
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/14697688.2002.0000015?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:2:y:2002:i:6:p:482-486. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RQUF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.