Risk Adjusted Breadth in Active Portfolio Management

Assoc. prof. Plamen Patev, Ph.D
I-Shou University

Kaloyan Petkov, Ph.D
ABIR Analytic

International Journal of Business & Management Studies ISSN 2694-1430 (Print), 2694-1449 (Online) Volume 02; Issue no 07: July, 2021

Abstract

Active portfolio management postulates that investors should seek increasing the breadth of their portfolio. Usually, investors associate breadth with the number of assets. Because of the unknown correlations between models’ forecasts and errors, breadth almost always is significantly less than number of assets in investors’ portfolio. In order to increase breadth, long investors must increase to higher extend the number of assets in their portfolio leading to ambivalent influence over active risk. One part of the active risk - tracking error can be diversified by increasing the number of assets but with diminishing result. The second part of the active risk - strategy risk constantly increases with number of assets. Therefore, theoretically there must be some optimum level of number of assets in portfolio which maximize alpha and IR of the investment. This optimum will depend on the specifics of investors’ benchmark. Taiwanese market with its broad index provokes active investors to increase the breadth significantly. We found for this stock market that breadth increasing can be effective for IR maximization when portfolio involves 15-25 number of assets (or 5%) of the assets. Further increasing in numbers will cause either alpha eating or total active risk increasing and eventually will result in lower IR.