An array of new investment products that arrived on the market in recent years have highlighted a perennial risk for advisors.
Dispersion risk — also known as tracking error — occurs when an asset’s actual return deviates from an expected return profile or benchmark. Clients, of course, are usually perfectly comfortable with upside surprises, but unwelcome news on the downside has become a stealth issue for advisors, who may have to explain underperformance when a managed fund underperforms the index or loses money during a downturn.
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