The Tortoise and the Hare: Portfolio Dynamics for Active Managers
2008; Euromoney Institutional Investor; Volume: 17; Issue: 4 Linguagem: Inglês
10.3905/joi.2008.17.4.106
ISSN2168-8613
Autores Tópico(s)Risk and Portfolio Optimization
ResumoActive portfolio management is dynamic: with turnover controlled, the impact of today’s trading persists into the future, where it influences future trading, commingles past and future information, and alters long-term performance. The best strategy for one portfolio rebalance is not the best strategy over many rebalances. The goal of this work is to expand our single-period analysis of active management to match the practical, multi-period world. How much turnover should active managers do? How should different signals be weighted to reflect their differing volatilities and predictive information horizons? What performance can we expect over many trading sessions? This article gives a simple solution for the time dimension of active management, helping active managers improve the long-run performance delivered to investors. The solution includes expressions for active risk, turnover, and active return before and after trading costs. An example solves the problem of “the tortoise and the hare:” how best to select turnover and combine one signal that has short-range predictive power with another that has long-range power. TOPICS: Equity portfolio management, portfolio management/multi-asset allocation, performance measurement
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