RETURN AND RISK CHARACTERISTICS OF TACTICAL ASSET ALLOCATION UNDER IMPERFECT INFORMATION

In an attempt to understand the return and risk characteristics of a t actical asset allocation strategy when there is a bias, the author der ives analytically tractable expressions for the average and volatility of tactical bet, alpha, tracking error, and information ratio of a TA A portfolio. Determinants of TAA performance are examined, and the rol e of the bias in determining the information ratio is investigated. Co ncepts behind ''alpha due to volatility capture'' and ''alpha due to b ias'' are explained. The author demonstrates how managers can use thes e results to form realistic expectations of TAA performance, as well a s to evaluate TAA managers. The results are general enough to be used as first-order approximations for all TAA strategies.