PT  - JOURNAL ARTICLE
AU  - Larry R. Gorman
AU  - Steven G. Sapra
AU  - Robert A. Weigand
TI  - The Cross-Sectional Dispersion of Stock Returns, Alpha, and the Information Ratio
AID  - 10.3905/joi.2010.19.3.113
DP  - 2010 Aug 31
TA  - The Journal of Investing
PG  - 113--127
VI  - 19
IP  - 3
4099  - https://pm-research.com/content/19/3/113.short
4100  - https://pm-research.com/content/19/3/113.full
AB  - Both the cross-sectional dispersion of U.S. stock returns and the VIX provide forecasts of alpha dispersion across high-performing and low-performing portfolios of stocks that are statistically and economically significant. These findings suggest that absolute return investors can use cross-sectional dispersion and time-series volatility as signals to improve the tactical timing of their alpha-focused strategies. Because active risk increases by a greater amount than alpha, however, high-return-dispersion/high-VIX periods are followed by slightly lower information ratio dispersion. Therefore, relative return investors who keep score in an information ratio framework are unlikely to find return dispersion useful as a signal regarding when to increase or decrease the activeness of their portfolio strategies.TOPICS: Volatility measures, performance measurement, passive strategies