Determining an Optimal Multiplier in Dynamic Core-Satellite Strategies

This paper investigates the performance of various multiplier techniques in reducing downside risk for dynamic core-satellite portfolios. Using Monte Carlo simulations calibrated on monthly data for three different portfolios over a ten-year period, we show that the dynamic IR/TE multiplier offers the best level of capital protection, as the specified floor is violated in less than 1% of the cases. Even though other multipliers might offer higher average excess returns, the IR/TE multiplier still captures a significant fraction of the satellite excess return. In addition, it delivers an almost constant average floor violation rate