Automatic Zoom Actual Size Page Fit Page Width 50% 75% 100% 125% 150% 200% 300% 400%
EQUITY PORTFOLIO MANAGEMENT STRATEGIES
Answers to Questions
Passive portfolio management strategies have grown in popularity because investors are
recognizing that the stock market is fairly efficient and that the costs of an actively
aged portfolio are substantial.
Numerous studies have shown that the majority of portfolio managers have been unable
to match the risk
return performance of stock or bond indexes. Following an indexing
portfolio strategy, the portfolio manager builds
a portfolio that matches the performance
of an index, thereby reducing the costs of research and trading. T
he portfolio manager’s
evaluation is based upon how closely the portfolio tracks the index or “tracking error,”
rather than a risk
Another passive portfolio strategy, buy
hold, has the investor purchase securities and
then not trade them
i.e., hold them
for a period of time. It differs from an indexing
strategy in that indexing does require some limited trading, s
uch as when the composition
of the index changes as firms merge or are added and deleted from the index.
There are a number of active management strategies discussed in the
sector rotation, the use of factor models, quantitative screens
, and linear programming
Following a sector rotation strategy, the manager over
weights certain economic sectors,
industries or other stock attributes in anticipation of an upcoming economic period or the
recognition that the shares are underva
Using a factor model, portfolio managers examine the sensitivity of stocks to various
economic variables. The managers then “tilt” the portfolios by trading those shares most
sensitive to the analyst’s economic forecast.
Through the use of computer
databases and quantitative screens, portfolio managers are
able to identify groups of stocks based upon a set of characteristics.
Using linear programming techniques, portfolio managers are able to develop portfolios
that maximize objectives while satisf
ying linear constraints.
Any active management technique incorporates fundamental analysis, technical analysis,
or the use the anomalies and attributes. For example, based upon the top
fundamental approach, a factor model may be used to tilt a portfo
lio’s sensitivity toward
those firms most likely to benefit from the economic forecat. Anomalies and attributes
can be used as quantitative screens (e..g, seek small stocks with low P/E ratios) to
identify potential portfolio candidates.
Three basic te
chniques exist for constructing a passive portfolio: (1) full replication of an
index, in which all securities in the index are purchased proportionally to their weight in
the index; (2) sampling, in which a portfolio manager purchases only a sample of the
stocks in the benchmark index; and (3) quadratic optimization or programming
techniques, which utilize computer programs that analyze historical security information
in order to develop a portfolio that minimizes tracking error.
These represent tradeoffs
between most accurate tracking of index returns versus cost.
Two investment products that managers may use to track the S&P 500 index include
index mutual funds, such as Vanguard’s 500 Index Fund (VFINX) and SPDRs, an ETF
that tracks the S&P 500. Per th
e textbook, the more accurate means of tracking the S&P
500 index has been VFINX; the SPDR “
shares do not track the index quite as closely as
did the VFINX fund.
Managers attempt to add value to their portfolio by: (1) timing their investments in the
various markets in light of market forecasts and estimated risk premiums; (2) shifting
funds between various equity sectors, industries, or investment styles in order to catch the
next “hot” concept; and (3) stockpicking of individual issues (buy low, sell
The job of an active portfolio manager is not easy. In order to succeed, the manager
should maintain his/her investment philosophy, “don’t panic.” Since the transaction costs
of an actively managed portfolio typically account for 1 to 2 perc
ent of the portfolio
assets, the portfolio must earn 1
2 percent above the passive benchmark just to keep even.
Therefore, it is recommended that a portfolio manager attempt to minimize the amount of
portfolio trading activity. A high portfolio turnover r
ate will result in diminishing
portfolio profits due to growing commission costs.
The four asset allocation strategies are: (1) integrated asset allocation strategy, which
separately examines capital market conditions and the investor’s objectives and
constraints to establish a portfolio mix
; (2) strategic asset allocation strategy, which
run projections; (3) tactical asset allocation strategy, which
portfolio mix as capital market expectations and relative asset valuations cha
investor’s objectives and constraints remain constant over the planning
horizon; and (4) insured asset allocation strategy, which presumes changes in investor’s
objectives and constraints as
his/her wealth changes as a result of
rising or falling
oriented investors (1) focus on the current price per share, specifically, the price of
the stock is valued as “inexpensive”; (2) not be concerned about current earnings or the
fundamentals that drive earnings
growth; and/or (3) implicitly assume that the P/E ratio is
below its natural level and that the (an efficient) market will soon recognize the low P/E
ratio and therefore drive the stock price upward (with little or no change in earnings).
d investors (1) focus on earnings per share (EPS) and what drives that
- This solution has not purchased yet.
- Submitted On 18 Jul, 2018 02:19:26