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The zero-capital approach to portfolio enhancement and overlay management

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  • Roger Bowden

Abstract

Both active and passive portfolio enhancement can be analysed within a zero-capital framework, wherein enhancement exposures are reported as an additional or secondary portfolio requiring zero capital. This enables an identification of the economic value added by the enhancement, using two complementary approaches. The first is based on traditional beta analysis, which is useful in identifying the direction and magnitude of exposures. The second is non-parametric in nature and plots ordered mean difference schedules for the enhancement against the base portfolio. This enables risk profiling where the manager can match the likely range of his or her own risk preferences against the empirical history of the relationship, so that explicit risk premiums do not have to be utilized. The empirical illustration exhibits asymmetries in the effectiveness of currency overlay.

Suggested Citation

  • Roger Bowden, 2003. "The zero-capital approach to portfolio enhancement and overlay management," Quantitative Finance, Taylor & Francis Journals, vol. 3(4), pages 251-261.
    • Handle: RePEc:taf:quantf:v:3:y:2003:i:4:p:251-261
    DOI: 10.1088/1469-7688/3/4/302
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    Cited by:

    1. Roger Bowden & Jennifer Zhu, 2010. "Multi-scale variation, path risk and long-term portfolio management," Quantitative Finance, Taylor & Francis Journals, vol. 10(7), pages 783-796.
    2. Roger Bowden, 2006. "The generalized value at risk admissible set: constraint consistency and portfolio outcomes," Quantitative Finance, Taylor & Francis Journals, vol. 6(2), pages 159-171.

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