What does the coverage ratio measure in portfolio management?

The coverage ratio in portfolio management typically measures the market value of jointly held securities between the portfolio and its benchmark. This ratio helps assess how well the portfolio's securities align with those of the benchmark, indicating the degree of overlap between the two. A higher coverage ratio suggests that the portfolio is closely following the benchmark, which can be indicative of a passive management strategy. In contrast, a lower coverage ratio may suggest a more active approach, where the manager selects a different set of securities from the benchmark.

This measurement not only provides insights into how diversified or concentrated the portfolio is compared to the benchmark, but it also helps in evaluating the risk profile associated with the investment. Understanding the relationship between the portfolio and the benchmark is crucial for effective performance evaluation and risk management, making this option a vital aspect of portfolio management analysis.