@article {Gorman113, author = {Larry R. Gorman and Steven G. Sapra and Robert A. Weigand}, title = {The Cross-Sectional Dispersion of Stock Returns, Alpha, and the Information Ratio}, volume = {19}, number = {3}, pages = {113--127}, year = {2010}, doi = {10.3905/joi.2010.19.3.113}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Both the cross-sectional dispersion of U.S. stock returns and the VIX provide forecasts of alpha dispersion across high-performing 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.TOPICS: Volatility measures, performance measurement, passive strategies}, issn = {1068-0896}, URL = {https://joi.pm-research.com/content/19/3/113}, eprint = {https://joi.pm-research.com/content/19/3/113.full.pdf}, journal = {The Journal of Investing} }