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.
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IJBMS by IPRPD is licensed under a Creative Commons Attribution 4.0 International License.