Cross-Sectional Dispersion of Stock Returns, Alpha and the Information Ratio
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Authors
Weigand, Robert A.
Sapra, Steven G.
Gorman, Larry R.
Issue Date
2009-07-1
Type
Working paper
Language
en_US
Keywords
Alpha , Information ratio , Cross-sectional dispersion , Volatility , Portfolio management
Alternative Title
Abstract
We find that the cross-sectional dispersion of U.S. stock returns provides economically significant forecasts of alpha dispersion across high- and low-performing portfolios of stocks over 3-month and 1-year horizons. Conventional measures of time-series volatility provide similar signals regarding alpha dispersion, but neither cross-sectional return dispersion nor time-series volatility identify future dispersion in the information ratio. These results suggest that absolute return investors can use both cross-sectional dispersion and time-series volatility as signals to improve the tactical timing of their alpha-focused strategies, but relative return investors, keeping score in an information ratio framework, are unlikely to find dispersion or volatility valuable as signals of when to increase or decrease the activeness of their strategies.
Description
Citation
Publisher
Washburn University. School of Business