RT Journal Article
SR Electronic
T1 The Cross-Sectional Dispersion of Stock Returns, Alpha, and the Information Ratio
JF The Journal of Investing
FD Institutional Investor Journals
SP 113
OP 127
DO 10.3905/joi.2010.19.3.113
VO 19
IS 3
A1 Larry R. Gorman
A1 Steven G. Sapra
A1 Robert A. Weigand
YR 2010
UL https://pm-research.com/content/19/3/113.abstract
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