“misfit risk results from differences between the manager’s normal portfolio and the broader asset class.”
saw the term broader asset class appear a few times in different readings already.
does it just mean market portfolio in general? or includes all the available asset classes?
TIA for replies!
I think it just refers to the universe of that asset class. So if it’s an equity portolio manager, the “broader asset class” is the set of all comparable equity. Or if it’s a fixed income portfolio, the broader asset class is the universe of all comparable fixed income.
On the same topic, if the manager will be selecting securities from the Managers “Normal” Benchmark and he is also evaluated against it, why do we need an “Investors Benchmark”? Wouldnt it be easy for the Manager to adopt the Investors Benchmark rather than his Normal Benchmark?
The Normal benchmark reflects the style portfolio of the manager. So it’s the securities that the manager normally chooses like an index of value stocks. Although, the investor may use a broader asset class that doesn’t represent the manager’s style. When hiring the manager the invesotr wants to to see the excess return over the broader asset class since that’s active return.
Agree with Ohai, except that I will call it ALL EQUITY (represented by say S&P500) rather than comparable equity.
The process is like this.
An investor say a pension fund designates S&P500 is the benchmark (for whatever reason).
A pension fund can choose to do indexing but to enhance return it will choose specialist managers (i.e. active and not an indexer)
Why would the pension fund hire an indexer when they can do it themselves?