Active Portfolio Management Strategy

In: Business and Management

Submitted By nnoida
Words 3376
Pages 14
Definition: In an active portfolio strategy, a manager uses financial and economic indicators along with various other tools to forecast the market and achieve higher gains than a buy-and-hold (passive) portfolio.
Tracking error is a measure of how closely a portfolio follows the index to which it is benchmarked. The most common measure is the root-mean-square of the difference between the portfolio and index returns.
Many portfolios are managed to a benchmark, normally an index. Some portfolios are expected to replicate, before trading and other costs, the returns of an index exactly (an index fund), while others are expected to 'actively manage' the portfolio by deviating slightly from the index in order to generate active returns or to lower transaction costs. Tracking error (also called active risk) is a measure of the deviation from the benchmark; the aforementioned index fund would have a tracking error close to zero, while an actively managed portfolio would normally have a higher tracking error. Dividing portfolio active return by portfolio tracking error gives the information ratio, which is a risk adjusted performance metric.
If tracking error is measured historically, it is called 'realised' or 'ex post' tracking error. If a model is used to predict tracking error, it is called 'ex ante' tracking error. The former is more useful for reporting performance, whereas ex ante is generally used by portfolio managers to control risk.

The individual investors who wish to adopt an active portfolio strategy would be required to look into matters of market timing, sector rotation, stock selection and conceptualization.
Market timing the purchase of stocks in the stock market would by default reduce the subsequent holding period of the stocks held in the portfolio with the expectation of a reasonable expectation of return at the point of sale, with the…...

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