7.11.2005

Q&A: Give an example how portfolio managers can beat...

...a buy-and-hold strategy on a risk-adjusted basis.

When the market fails to adjust prices rapidly to public information, porfolio managers can achieve superior investment performance with the help of superior analysts - someone who can time major market trends or identify undervalued securities.

Bonus Points

  • A profolio manager can manage actively, without changing the risk preferences of the client
    • looks for undervalued securities based upon superior fundamental analysis (including predicting earnings surprise). Mid-cap stocks are good candidates: generally not followed by as many analysts, more likely to be trading in a less efficient market and yet still liquid enough
    • attempts to time the market wherein asset allocation is shifted between aggressive and defensive positions
  • A portfolio manager can manage passively
    • Determine and quantify his risk preferences;
    • Construct the appropriate risk-level portfolio by dividing the total portfolio between lending or borrowing risk-free assets and a portfolio of risky assets.
    • Diversify completely on a global basis to eliminate all unsystematic risk.
    • Maintain the specific risk level by rebalancing when necessary.
    • Minimize taxes and total transaction costs (reduce trading turnover and trade relatively liquid stocks to minimize liquidity costs).
  • A portfolio manager can also invest in index funds: match the market at the lowest cost

Category: C++ Quant > Financial Markets

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