Modeling manager confidence in forecasted excess returns under active portfolio management

Abstract

In the framework of active portfolio management, we propose a novel methodology to incorporate the relative confidence given to the distribution of consensus excess returns with respect to the forecasted one. This methodology uses a particular case of the generalized hyperbolic distribution, and provides an intuitive and simple form to incorporate distribution uncertainty since closed-form expressions for the optimal portfolio weights are available for the unconstrained optimization problem. © 2014 Macmillan Publishers Ltd.