Normal Return Gaps

Posted: 1 Feb 2016 Last revised: 1 Apr 2020

See all articles by William W. Jennings

William W. Jennings

U.S. Air Force Academy - Department of Management

Thomas O'Malley

U.S. Air Force Academy - Department of Management

Brian Payne

US Air Force Academy

Date Written: January 30, 2016

Abstract

Despite ever more sophisticated risk management and measurement, investment professionals have generally overlooked a simple but powerful metric of relative risk and portfolio diversification -- the normal return gap. We develop a generalized specification of the expected difference in returns between two investments based on the normal distribution. We then demonstrate its applicability to capital market forecasts, manager selection, performance evaluation, style tilts, manager combinations, and rebalancing.

Keywords: portfolio choice, asset allocation, performance analysis, risk, private wealth management, mathematical methods

JEL Classification: G11, G23, C58, C65

Suggested Citation

Jennings, William W. and O'Malley, Thomas and Payne, Brian, Normal Return Gaps (January 30, 2016). Available at SSRN: https://ssrn.com/abstract=2725271 or http://dx.doi.org/10.2139/ssrn.2725271

William W. Jennings (Contact Author)

U.S. Air Force Academy - Department of Management ( email )

2354 Fairchild Drive
Suite 6H-94
Academy, CO 80840-2944
United States

Thomas O'Malley

U.S. Air Force Academy - Department of Management ( email )

2354 Fairchild Drive
Suite 6H-94
Academy, CO 80840-2944
United States

Brian Payne

US Air Force Academy ( email )

Colorado Springs, CO
United States

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