Investment managers often manage a portfolio with respect to a benchmark. Typically, they use a mean‐variance optimization framework to maximize the information ratio of their portfolio. We develop an unconventional approach to this question. Given a set of assumptions, we ask what optimal percentage of the benchmark stocks the portfolio manager should select. This optimal portfolio depends on Fisher's and Wallenius's noncentral hypergeometric distributions. We find that the optimal selectivity of a benchmark universe varies from 50% to 80%. These results are provocative, given that many enhanced index portfolio managers select a low percentage of the benchmark universe.
This article examines the efficiency of the weather futures market traded on the CME in both HDD and CDD futures contracts in 18 cities across the United States. Efficiency is examined in three ways. First, by comparing the market's implied forecasts for the weather against other forecasts. Second, by looking at whether market's overreact or under-react to temperature surprises. Third, by looking at weather derivative patterns across cities. We find that generally the market seems very efficient despite its lack of liquidity. We also find risk premia that seem to vary across cities and over time.
a b s t r a c tThe objective of this paper is to explore and identify inflation as it is embedded in a broad range of asset classes beyond simply TIPS, oil, gold and real estate. The analysis is conducted primarily from the perspective of investors in a range of countries that span the developed and emerging world including resource intense economies and those that have previously experienced hyperinflation. We find that an investor who is looking for a reasonable positive real return of 4.5% while minimizing the downside risk with respect to inflation will have an allocation that consists primarily of short-term bonds, longer-term bonds, some gold, some oil, and some emerging market equities. The weight of gold and oil together is less than 10% of the portfolio and is not always relevant for all countries. We find that achieving stable real returns during hyperinflationary periods is virtually impossible without access to a vast array of short-term fixed income instruments. Despite this, the out-of-sample performance of the real return optimizations is quite promising, providing an emulative inflation protection strategy for international investors of all sorts.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.