37 Pages Posted: 6 Aug 2009 Last revised: 9 Feb 2010
Date Written: January 21, 2010
Both the cross-sectional dispersion of U.S. stock returns and the VIX provide forecasts of alpha dispersion across high- and low-performing portfolios of stocks that are statistically and economically significant. These findings suggest that absolute return investors can use cross-sectional dispersion and time-series volatility as signals to improve the tactical timing of their alpha-focused strategies. Because active risk increases by a greater amount than alpha, however, high return dispersion/high VIX periods are followed by slightly lower information ratio dispersion. Therefore, relative return investors who keep score in an information ratio framework are unlikely to find return dispersion useful as a signal regarding when to increase or decrease the activeness of their portfolio strategies.
Keywords: Alpha, Information Ratio, Cross-Sectional Dispersion, Volatility, VIX
JEL Classification: G11, G17
Suggested Citation: Suggested Citation
Gorman, Larry R. and Sapra, Steven G. and Weigand, Robert A., The Cross-Sectional Dispersion of Stock Returns, Alpha and the Information Ratio (January 21, 2010). Journal of Investing, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1444868