Active Portfolio Management

Strategies

Active Factor Portfolio

ri i i,1.FP1 i ,2 .FP2 i ,3.FP3 ...... i

Active returns = Active factor returns + Active

specific returns
Active risk squared = Active factor risk +
Active specific risk

Active Factor Portfolio

n

Active Factor Re turns ( P B ).FPi

i 1

Active Specific Re turns ( wi , P wi , B ).( Ri , p RB ,avg )

i 1

i 1

j 1

Active Factor Risk {( P,i B ,i ). ( P , j B, j ).Cov ( Fi , Fj )}

n

Active Specific Risk ( wi , P wi , B ). e2,i

i 1

Investment Styles and Benchmarks

Value

Low P/E or P/B; high dividends; cyclical stocks

Financial services; utilities
Market efficiency
Behavioral aspects for depressed prices
Riskier, illiquid stocks

Growth

High earnings growth expectations; low dividends

Technology; healthcare; innovative stocks

Market cap investing

Small; mid and large cap

Compensating Managers
Actual Portfolio
Nominal Portfolio Managers Style
Benchmark Portfolio
True active returns = Actual Portfolio returns
Nominal Portfolio returns
Misfit active returns = Nominal Portfolio returns Benchmark Portfolio returns

Total active risk (true active risk ) 2 (misfit active risk ) 2

True IR

True active returns

True active risk