Portfolio Management

Introduction

During the last two decade, portfolio management becomes more common throughout the world. Investor would identify the best strategy which tailors for their company. Nowadays, passive and active are two major type of portfolio management.

Initially, people who believed in efficient market theory would tend to follow passive investment. It basically assumes that the all public information has to fulfill to the system as quick as possible in an unbiased way. The principle of passive management is to lessen the management fees and to avoid the adverse effects during downturn period. One of the common strategies of passive management is “buy and hold” strategy. On the other hand, other investors who believe the market is inefficient would seek active strategy to generate riskless profit. Managers would rely on the current information to forecast the market movement and to achieve a better performance. The common method of active management is tracking error and active share.

Passive Management

The goal of investor is to earn as much as possible from the investment, since investors will maximize their expected return and utilities. However, investors are generally risk adverse. Under passive management, efficient market hypothesis is hold; investors believe the market is efficient and impossible to beat the market. They intend to minimize the firm-specific risk, transaction cost and management fees. The most common strategy is to replicate the index fund individually. Investor buys a portfolio of stock and holds the portfolio closely to the levels in the actual index for a specified period through buy-and-hold strategy.

Second, investors who desire to reduce risk and the expenses of the investment would pursue passive strategy. Due to low turnover rate, it will cost relatively less in management fees, transaction cost and capital gain tax. Hence, passive management require less knowledge, managers do not need to make too much decisions during the...