Dynamic Tracking Error and the Total Portfolio Approach
Abstract
The Total Portfolio Approach and Strategic Asset Allocation are widely viewed as competing frameworks for institutional portfolio management. We argue they differ in a single governance parameter: the tracking error constraint. Using U.S. equity and bond data from 2000 to 2026, with portfolio simulations spanning 2004 to 2026, we show that Sharpe ratios are statistically indistinguishable across the full constraint spectrum while the volatility of realized tracking error varies approximately 12-fold. The cost of constraints spikes during crises, when forward returns are richest and governance pressure to de-risk is strongest. Dynamic tracking error subsumes both approaches and provides boards with a more productive framework for investment governance.
Keywords
Cite
@article{arxiv.2603.03213,
title = {Dynamic Tracking Error and the Total Portfolio Approach},
author = {Ashwin Alankar and Allan Maymin and Philip Maymin and Myron Scholes and Sujiang Zhang},
journal= {arXiv preprint arXiv:2603.03213},
year = {2026}
}
Comments
56 pages, 7 exhibits