TARGETING EXCESS-OF-BENCHMARK RETURNS - THE BENCHMARK PORTFOLIO AS THE ZERO-RISK ASSET

In this article, the author presents a portfolio selection framework that defines return as the excess-of-benchmark return, and risk as the benchmark tracking error. Portfolio selection is thus reduced to identifying the mix expected to achieve the desired incremental return over the benchmark with the least tracking error. A fifty-year stimulation employing this framework suggests that substantial excess returns can be achieved with relatively low tracking error.